National central banks operate with their own counterparties i.e. with the banks operating in their home countries, using three instruments:
- open market operations;
- standing facilities;
- required minimum reserves.
These instruments are used in order to obtain the desired effects on liquidity in the euro area, on interest rates and, more generally, on money market conditions.
Open market operations are designed to create or absorb liquidity.
They are executed on the basis of tenders or bilateral procedures and, depending on their purpose and duration, can be broken down into different categories:
- main refinancing operations: regular liquidity-providing transactions with a frequency and maturity of normally one week;
- longer-term refinancing operations: liquidity-providing transactions with maturity of normally three months;
- fine-tuning operations: no fixed maturity, held in order to smooth the effects of unexpected fluctuations in liquidity and interest rates; they can take the form of refinancing operations or of fixed-term deposits;
- structural operations: held to adjust the structural position of the Eurosystem vis-à-vis the banking sector or the amount of long-term liquidity available in the market.
Operations that can be activated on request by eligible counterparties (the deposit facility and the marginal lending facility, both overnight) enable credit institutions to redress their liquidity imbalances at the end of the working day.
All credit institutions operating in euro-area countries fulfilling certain eligibility criteria can take part in open market operations and in standing facilities (see the section on Monetary policy counterparties). Liquidity providing operations (such as the main refinancing operations, longer-term refinancing operations, and the marginal lending facility) are only conducted against adequate collateral (see the section on Collateral management).
