Easy Loans

Mario Draghi announced an unlimited bond buying program at todays ECB meeting. The program, which will be called "Monetary Outright Transactions," will allow the ECB to address "short-term distortions in financial markets." The following are some key aspects of the program:

Bond Purchases
The ECB has committed to potentially unlimited purchases of sovereign bonds "to the extent that they are warranted from a monetary perspective."The program will not set an explicit range on interest rates, as had been speculated. Instead the ECB will bring interest rates down to levels consistent with what it believes the nations would pay absent risk premia associated with concerns of a breakup of the euro. The purchases will focus on the shorter end of the yield curve, specifically the 1-3 year range. In addition the ECB has said it will hold no seniority on bonds it purchases.

Sterilized Purchases
The program will “sterilize” purchases to offset the effect of injecting cash into the system. The ECB will remove cash from the system elsewhere in proportion to what it spends on transactions, ensuring a neutral impact on the money supply.

Highly Conditional
The program will have "strict and effective conditionality," any nation looking to receive help under the program must apply for aid from one Europe’s bailout funds and abide by the orm program set forth there. Any country that fails to meet the conditions of its’ aid could see the ECB either stop purchases, or sell existing bonds.

Within ECB Mandate
The ECB is acting within its mandate to maintain price stability within the medium term.

Takeaway
"We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the euro area. sayaTs will enable us to address severe distortions in government bond markets, which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro."

Watch Draghis press conference below.

“The banking industry is pleased that the overwhelming majority of institutions passed the Federal Reserve’s stress tests with flying colors. The banking industry has worked hard to fortify its financial base since the financial crisis. The industry is now very well prepared for any challenging economic circumstances that could arise.

At the same time, we object to testing bank capital under theoretical conditions that are far more severe than even those seen during ‘the Great Recession.’ It unjustifiably prohibits some institutions from paying dividends to shareholders and could potentially impair their ability to raise capital and make loans. That is an unnecessary and ill-timed consequence of these stress tests given the essential role of banks in our still-recovering economy.”

By Frank Keating, ABA President and CEO

Read the Federal Reserves release.