Comparison Between Long Term Refinancing Operation and Quantitative Easing (Qe)

In: Business and Management

Submitted By lovedirk
Words 435
Pages 2
QE, in definition, is a monetary policy that increases the money supply by buying government securities or any other securities from the market. With Slight difference, LTRO refers that central bank lends out money to other commercial bank in a low interest rate but with qualified collateral.
Both of them are monetary policy that aim to increase the money supply by inject capital to the financial market. The main purpose is to facilitate the lending in financial market and lead the financial market become more liquid.
However, the process to achieve the loose monetary policy goal is different. The main points are summarized as following
1) In terms of the amount of money inject to the financial market, it is planed and certain in QE because the quantity is directly controlled by the central bank while for the LTOR it is uncertain for the reason that whenever the banks can provides qualified collateral, central bank should lend them money. However, central bank can define the quality of the collateral so that indirectly control the amount of money.
2) As for the kinds of security that the injected money buy, QE1 purchased the mortgage back securities and QE2 put money in Treasury securities. However, implementing the LTRO, the freedom of choosing securities totally belongs to the banks. They can put aside the money borrowed for the return to the coming debt. Also, they can invest in some bonds that are qualified by central bank as collateral and use them as collateral for lending more money. Alternatively, they may invest in some attractive corporate bond to earn the difference between borrowing, say 1% and lending, say 5%.
3) In the aspects of risk, in the case that the government bonds invested by central bank in QE are default, the central bank will suffer. Thus the central bank becomes the last resort of lending of the whole country. However, under the…...

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