A blog post on the European Central Bank (ECB) website by Fabio Panetta, member of the Executive Board of the ECB, has explored the moves that the bank has taken to address a wide range of economic challenges the eurozone faces as a result of the COVID-19 outbreak. On the monetary policy side of things, Panetta notes that the ECB has lowered the cost and improved the availability of financing for all sectors of the economy. For example, it recently decided to allow banks for the first time to obtain liquidity from the ECB using as collateral loans to self-employed workers and households that benefit from government or public sector guarantees (such as those provided by euro area countries in response to the coronavirus pandemic). This will incentivise banks to extend such loans.

The key point Panetta makes, however, is that the role of the ECB is not confined to monetary policy. Take payments, for example. Guaranteeing the availability of payment services is an important part of the central bank’s mission, one that is essential not only for monetary policy implementation but also for peoples’ everyday lives. Accordingly, the blog outlines the ways that the ECB is working to ensure the continuity and safety of firms’ and families’ transactions, and the integrity of the euro area payment and financial system.

The provision of banknotes

Adequate availability of cash is crucial for the functioning of the economy. Even in normal times, three-quarters of consumer transactions in the euro area are made in cash, with large countries such as Germany, Spain and Italy using cash at rates that are around or even well above the euro area average. Cash therefore remains the dominant means of payment for consumers, and is of fundamental importance for the inclusion of socially vulnerable citizens, such as elderly or lower-income groups.

During the crisis the demand for cash has become less predictable. As the pandemic spread across Europe, the ECB saw a spike in demand for cash: in mid-March, the weekly increase in the value of banknotes in circulation almost reached the historical peak of €19bn. This increase partly reflected higher spending in supermarkets and shops - particularly from 13 to 20 March, when the demand for cash was similar to that in the week before Christmas. But it also reflects people’s impulse to hoard cash during a crisis. In early April cash demand returned to normal levels, and several countries are now seeing cash withdrawals below expected levels for the time of year; this is partly due to the lockdown, which has limited the opportunities for spending.

The Eurosystem - the ECB and the 19 euro area national central banks (NCBs) - plans the activities related to the cash supply chain (production, storage, distribution and re-circulation) well in advance. However, as a result of the current lockdown the ECB is adapting its processes on an ongoing basis to ensure that the banknotes supply chain remains intact. Panetta says the bank has intensified the (virtual) contacts that take place between the ECB – acting as coordinator – and the NCBs and, at national level, between the NCBs and external partners such as cash-in-transit companies and banks.

For example, possible bottlenecks in printing - including the availability of raw materials - and processing banknotes for circulation are being addressed, at the same time ensuring that all necessary health and safety precautions are observed. Measures are also being taken to address problems in the transportation and processing of banknotes caused by staff being confined to their homes. And when the usual cross-border transportation systems - particularly air transport - are disrupted due to the limited number of available flights or concern that NCB couriers and carrier personnel might need to be quarantined after travelling abroad, the transfer of banknotes among NCBs is re-scheduled.

The ECB is also working with European laboratories to assess the behaviour of coronaviruses on different surfaces. The results indicate that coronaviruses can survive more easily on a stainless steel surface (e.g. door handles) than on cotton euro banknotes, with survival rates approximately 10 to 100 times higher in the first few hours after contamination. Other analyses indicate that it is much more difficult for a virus to be transferred from porous surfaces such as cotton banknotes than from smooth surfaces like plastic.

Electronic payments

The COVID-19 crisis is reinforcing an existing trend: the rising demand from consumers and merchants for efficient payment schemes. Now more than ever Europeans want safe, low-cost and easy-to-use electronic payment solutions to cope with the lockdown and to transfer money electronically to firms or family across Europe. Likewise, efficient payment systems are necessary to quickly mobilise the resources made available to support small companies, self-employed workers and social institutions.

Even before the outbreak of the pandemic, the ECB stressed that Europe must be able to supply fundamental services such as electronic payments autonomously, in order to strengthen its sovereignty in the global economy. With this in mind, the Eurosystem’s retail payment strategy aims to foster pan-European market solutions for instant payments at the point-of-sale (to pay in brick-and-mortar shops) and online payments (for e-commerce). Panetta says the ECB is actively supporting initiatives that allow European users to reap the benefits of the Single Market and that can fulfil the following key objectives: full pan-European reach and unified customer experience; convenience and cost efficiency; safety and security; European identity and governance; and, in the long run, global acceptance. Work in this field is continuing despite current events, with regular contact between the ECB, the European Commission and private payment service providers.

The ECB is also exploring possible future avenues by assessing the case for issuing a ‘digital euro’. A task force is currently examining the pros and cons of introducing a digital currency, which could be used by intermediaries or even by citizens through their electronic devices (such as smartphones or tablets) for their day-to-day spending needs. However, the blog says that ECB analysis of the opportunities and challenges of central bank digital currencies - which will consider the experience of the COVID-19 crisis - should not discourage or crowd out market-led initiatives aimed at introducing private electronic means of payment with similar features in terms of user needs.

Market infrastructures

Such innovations in the field of payments have been made possible by advances in the infrastructures underlying financial transactions. Panetta cites the Eurosystem’s TARGET Instant Payment Settlement (TIPS) service as an example, an infrastructure that allows funds to be transferred in real-time around the clock every single day of the year. The system, which went live in November 2018, finalises instant payments in central bank money, meaning that it does not entail financial risk for either the payer or the payee. It can also handle payments in other currencies; indeed, earlier this month, the Swedish central bank, Sveriges Riksbank, decided to adopt TIPS as of May 2022, relying on the Eurosystem to process the 1.5 million instant payments made daily in Swedish krona. TIPS is designed to settle a regular load of more than 43 million instant payment transactions a day, and could handle up to 2,000 transactions per second in peak times.

In a bank-financed economy like the euro area, banks must be able to negotiate huge amounts of liquidity in a safe, fast and efficient way in order to keep the real economy going. To this end, the Eurosystem operates the TARGET2 real-time gross settlement (RTGS) system. Through TARGET2, large payments in euro by central banks and commercial banks are processed and settled in central bank money, i.e. in accounts held with a central bank. More than 1,000 banks currently use TARGET2 to initiate transactions in euro, and 52,000 banks worldwide and their customers can be reached via TARGET2. In recent weeks, Panetta says that the ECB has been monitoring the performance of TARGET2 particularly closely: the system registered an increase in the number of transactions (around 361,500 on a daily basis on average in March, as against 346,000 on average in March 2019) and has continued to perform efficiently.

During crises, investors typically modify the composition of their securities portfolios in order to respond to changes in the economic and financial environment and to weather shocks to their income and wealth. This is only possible if people and financial institutions such as banks and insurance companies can rely on high-performing infrastructures that allow financial assets, such as bonds and shares, to be bought and sold quickly, safely and efficiently. In the euro area, the platform where these transactions are processed - TARGET2-Securities (T2S) - is managed by the Eurosystem. Currently 20 countries across Europe use T2S.

Despite the market turbulence of recent weeks, Panetta says that the resilience of T2S has allowed it to handle the exceptionally high volumes of trading in European bonds and shares. In March, the volume of daily transactions settled almost doubled, from a previous average of 600,000 to 1,000,000, with a peak of more than 1,200,000. Even under these high volumes, T2S continued to operate smoothly, although it did experience slowdowns and delays especially during the critical end-of-day phase of the settlement process. This required the prompt implementation of mitigation measures, which involved strengthening the hardware resources and fine-tuning the organisation of the different phases of the T2S settlement procedures. As a result, the performance of the system improved, with no further delays in the start of the night time settlement as of 23 March.

The payment infrastructures operated by the Eurosystem rely on smooth technical and institutional cooperation with privately run market infrastructures. These include central counterparties (entities which facilitate the trading of derivatives and equities and reduce counterparty, operational, settlement, market, legal and default risk for traders, and hence for investors) and central securities depositories (entities which provide a central point for depositing financial instruments such as bonds and shares).

The blog notes that ECB systems remain well-prepared to cope with possible additional trading volumes, although such increases will require vigilance and close coordination among the ECB and NCB staff involved in managing the system.

Cyber resilience

The COVID-19 crisis has also increased the risks for cybersecurity. Corona-themed phishing campaigns are spreading in a world where, for many, working from home may become the new normal. This also exposes financial market infrastructures, private and public alike, to increased cyber threats, creating a need for such infrastructures to work together to find ways of preventing and responding effectively to such attacks.

The ECB recently established the Euro Cyber Resilience Board (ECRB) for pan-European Financial Infrastructures, in which Europol and the European Union Agency for Cybersecurity also participate. The ECRB provides a forum for the sharing of knowledge to increase systemic resilience against cyber risks. In recent weeks, its members agreed to share cyber information and intelligence to a greater degree, with the aim of identifying cyber threats and exchanging best practices to prevent attacks. This has the potential to serve as a model for the exchange of information and intelligence internationally with a view to increasing global resilience.

Panetta concludes by stating that we are living through times of unprecedented challenges and risks. He says the ECB is seeking to identify those risks at an early stage in order to provide a timely and effective response. 

He notes that, while many measures will go unnoticed by the public, Europeans can trust in the ECB’s commitment to support them throughout this crisis. This will be the case, so long as the ECB can continue to support the payments systems and market infrastructures under its purview.