Boosting Monetary Policy Capacity2 min read
State-backed emergency lending schemes have been among the most important tools for supporting small and medium enterprises during the Corona crisis. Examples include PPP in the US, CBILS in the UK, KfW-guaranteed loans in Germany, or BPI-guaranteed loans in France. However, even though most states quickly moved to guarantee 100% of eligible loans, banks often remained hesitant to extend new credit.
Similar problems of non-lending in the aftermath of 2008 were addressed through Targeted Longer-Term Refinancing Operations (TLTROs) in the Eurozone and the Funding for Lending Scheme (FLS) in the UK: through these programmes the transmission of new cash to banks was conditioned on banks demonstrating new and relevant lending. This approach was effective, but it continues to rely on banks as the (inevitably fallible) transmission mechanism for monetary policy stimulus. As a result, it failed to prevent similar issues in March and April 2020.
An additional solution which could be adopted after Corona could take the following form. The ECB and other central banks could offer every interested citizen, resident, firm, and unit of government (e.g. municipalities) a simple deposit account, functioning exactly like ordinary bank accounts at commercial banks. Privacy concerns could be addressed through appropriate design and data storage choices. Together with an app and debit cards to allow payments and transfers directly to and from these accounts, this would constitute a step towards the creation of universally accessible central bank digital currency (CBDC).
In a crisis, this infrastructure could be used to inject funds directly to firms and households, without relying on banks as intermediaries. While this infrastructure would not allow for the direct provision of loans by the central bank to firms and households — a different and technically more demanding task — it could be used for emergency purchasing power support at short notice. Conversely, when monetary policy is tightened, interest rates on these accounts could be increased to encourage saving over consumption, without any risk of higher interest rates not being transmitted to savers.
Besides improving the transmission of monetary policy, this proposal would increase the stability and resilience of the payment system: households and non-financial firms would no longer have to rely on commercial banks as guardians and ferrymen of their liquid assets. In future crises similar to COVID or the 2008 financial crisis, large parts of the payment system would then be insulated.
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