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  • Writer's pictureJohn Shelburne

Answers about the impact of the corporate sector purchase program using

ECB CSPP impact on corporate bond markets
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Provide me with a summary of the following paper as if I were a high school teacher that loved the NFL.

Here is a NFL-themed summary of the research paper:

The Impact of the Corporate Sector Purchase Programme on Corporate Bond Markets and the Financing of Euro Area Non-Financial Corporations

The Eurosystem has been running an aggressive offense with its corporate bond buying program, known as the Corporate Sector Purchase Programme (CSPP). Announced in March 2016, this program allows the Eurosystem to purchase investment-grade corporate bonds issued by non-bank corporations in the euro area.

Much like Tom Brady marching the Patriots down the field with precise passes, the CSPP has moved the needle significantly for euro area corporations looking to raise funding. Corporate bond spreads have tightened across the board, allowing companies easier access to financing in the bond market. The research finds that the CSPP accounts for a sizable 25 basis point drop in spreads for eligible bonds since the program began.

With more attractive funding options available in the bond market, some companies have shifted away from bank loans. However, this has not sacked lending volumes overall. Just as a strong passing game can open up the run, the CSPP has freed up banks to lend more to small and medium-sized companies that don't have direct access to the corporate bond market.

The Eurosystem has managed the CSPP adeptly, ramping up or down purchases each month based on changing market conditions - not unlike a coach sticking to the hot hand. This flexible approach has allowed the CSPP to provide meaningful monetary stimulus without adversely affecting market functioning.

In summary, the CSPP has improved financing conditions for euro area companies much like an elite quarterback can elevate an entire offense. The Eurosystem has deftly managed the program to provide a boost to the real economy.

Does the paper go over how much has been lent to small and medium sized businesses?

No, the paper does not provide specific numbers on how much has been lent to small and medium-sized businesses as a result of the CSPP freeing up bank balance sheets. The paper states that there are "indications that the CSPP has freed up the balance sheet capacity of banks to lend to companies that are not eligible under the programme, particularly smaller firms." However, it does not quantify the exact lending amounts. The evidence provided is mostly qualitative, such as surveys showing SMEs reporting increased willingness of banks to provide credit after the CSPP was introduced. But the paper does not give hard statistics on the euro amounts of new lending attributable to the CSPP.

What is a non-bank?

A non-bank is a financial institution that does not have a full banking license and is not regulated as a bank. Some common examples of non-banks include:

- Insurance companies

- Pension funds

- Investment funds

- Financial leasing companies

- Consumer and commercial finance companies

- Broker-dealers

- Mortgage companies

The key distinction is that non-banks do not take deposits from consumers and businesses like a traditional commercial bank. As a result, non-banks are typically more limited in the range of financial services and products they can offer compared to banks.

In the context of this paper, "non-bank corporations" refers to corporations in non-financial sectors of the economy (e.g. manufacturing, technology, retail). The paper is examining how the CSPP affected financing conditions and the bond markets for these mainstream non-financial corporations, as opposed to banks and other financial institutions.

Where can I find a list of all of the non-bank purchases by the CSPP?

The research paper itself does not provide a comprehensive list of all the non-bank purchases made under the CSPP. However, some information on CSPP holdings can be found in the following sources:

- The ECB publishes a breakdown of aggregate month-end CSPP holdings by country and sector. This data can be found on the ECB's website in their statistical data warehouse.

- The ECB also publishes a weekly list of all bonds held under the Asset Purchase Programme (APP), which includes the CSPP. This data shows ISIN codes and holding amounts for individual securities. It is published here:

- The ECB releases an annual breakdown of all individual securities held under the APP, including the issuer name, ISIN, holding amount, etc. The latest data is as of 31 December 2021. This can be found here:

- Some private data providers, such as IHS Markit, also estimate and publish data on the ECB's CSPP holdings.

So in summary, while the research paper itself does not list all the CSPP purchases, there are some public data sources that provide information on holdings, albeit with a lag and some aggregation. But a complete bond-by-bond list is not readily available from the ECB.

Does the CSPP have a bias when purchasing non-bank bonds? Are they buying more manufacturing bonds vs others?

The paper does not provide a detailed breakdown of CSPP purchases by industrial sector to show if there is any bias towards manufacturing bonds or other sectors. However, it does make the following points about how purchases are allocated:

- The Eurosystem aims to ensure diversification across issuers, sectors and countries when making CSPP purchases. This suggests they try to avoid over-concentration in any particular area.

- The allocation across primary and secondary markets is flexible based on changing market conditions and availability. This again indicates purchases are not targeted at specific sectors.

- Holdings of individual bonds can deviate from their weight in the overall market based on liquidity and availability. This allows adaptation to market dynamics.

- Purchases have been concentrated in bonds issued by companies based in Germany, Spain, France, Italy and the Netherlands. But this likely reflects the overall distribution of euro-denominated corporate bond issuance.

- There are no indications given that the Eurosystem deliberately favors or targets purchases of manufacturing bonds compared to other sectors.

So in summary, while the paper does not provide a sector breakdown of purchases, the principles outlined for allocation suggest the CSPP does not intentionally favor manufacturing or any other specific sector. The purchases aim to provide broad support across the corporate bond market rather than target particular industries. But granular data on holdings by sector is not provided to fully confirm this.

What are the implications for market pricing?

The paper discusses some implications of the CSPP for market pricing and liquidity conditions in corporate bond markets:

- Corporate bond spreads have declined significantly since the start of the CSPP. The paper attributes a large portion of this spread compression directly to the effects of the CSPP purchases. This indicates the program has helped lower borrowing costs for companies.

- The CSPP purchases have not been found to have a noticeable distorting impact on relative price formation in bond markets. Analysis of large individual CSPP trades shows minimal impact on pricing of those specific bonds around the time of the trades.

- Bid-ask spreads for corporate bonds have declined markedly since the start of the CSPP program. This suggests the regular presence of the CSPP in bond markets has supported liquidity conditions and lowered transaction costs.

- The paper argues the flexible pace of purchases and allocation across primary/secondary markets under the CSPP has prevented negative impacts on overall market functioning.

- Holdings are concentrated in recently issued, more liquid bonds which likely limits impacts on trading conditions in less liquid securities.

In summary, the evidence suggests the CSPP has helped compress corporate borrowing costs without adversely affecting price discovery, liquidity and efficiency in the corporate bond market. The impacts on pricing appear supportive of easier financing conditions for companies while minimizing distortions. However, disentangling the exact impacts of the CSPP from other factors affecting these markets is challenging.

Does the market know when the CSPP is buying?

The paper does not directly discuss whether the market is aware in real-time of when the CSPP is making purchases. However, some inferences can be made:

- The ECB does not provide any official real-time notification or schedule of its CSPP purchases.

- However, the ECB does publish weekly aggregated data on all bond purchases under the Asset Purchase Programme (which includes the CSPP) with a one-week lag.

- The ECB also releases monthly data on aggregate CSPP purchases specifically, though again with a lag of several weeks.

- Market participants may be able to discern some CSPP purchase activity indirectly through observing market prices and volumes. Significant buying interest in a particular bond may signal CSPP demand.

- That said, the ECB aims to minimize market impacts from its purchases through flexibility in sizing and timing. Sudden buying interest in a bond may not obviously stand out as CSPP-related.

- The paper suggests individual CSPP trades have not had significant identifiable market impacts based on analysis around purchase dates.

So in summary, while not definitively stated, it appears the market does not know the exact timing of CSPP purchases in real-time given the lag in official data reporting. However, market participants likely can make some reasonable inferences on CSPP activity through observing market conditions. But the ECB does not officially communicate its purchase schedule. The lack of transparency likely helps minimize potential market distortions.

Who clears the CSPP trades?

The research paper does not specify which entities clear and settle the trades conducted under the Corporate Sector Purchase Programme (CSPP). However, some additional sources suggest that:

- For the broader Asset Purchase Programme (APP), of which the CSPP is a component, trades are generally settled through the central securities depositories of the countries where the securities are issued.

- For example, trades in German bonds settle via Clearstream in Frankfurt, while trades in French bonds settle via Euroclear France in Paris.

- Many over-the-counter bond trades in Europe are cleared through LCH, part of the London Stock Exchange Group. LCH likely clears a portion of the OTC corporate bond trades done by the Eurosystem under the CSPP.

- Major custodian banks like BNY Mellon and State Street provide custody services and asset servicing for many of the national central banks participating in the APP. These custodians likely help facilitate the settlement of CSPP purchases.

- The Eurosystem counterparties engaging in the actual bond trades with the central banks also handle much of the clearing process as part of executing the transactions.

So in summary, while not definitively stated in the paper, the CSPP trades likely involve a mix of national central securities depositories, international clearing houses like LCH, custodian banks, and dealer counterparties to handle the post-trade clearing, settlement and custody processes. But the exact breakdown is not readily available.



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