In Frankfurt, Isabel Schnabel’s recent speech marked a quiet turning point in how the European Central Bank envisions its role in a post-crisis, post-QE era. Speaking at the ECB Conference on Money Markets, she outlined a strategy of “quantitative normalisation” – not tightening – that will redefine the Eurosystem’s balance sheet as a more responsive, demand-driven mechanism built around collateralised lending rather than large-scale bond holdings.
The shift reflects how the ECB is adapting to an environment of strong bank liquidity, retreating excess reserves, and a financial system no longer reliant on emergency stimulus. Since 2022, the Bank’s policy-related assets have fallen by nearly half, yet market stability has held. This, Schnabel argued, shows that normalisation can proceed without disruption – provided the ECB preserves access to liquidity through its fixed-rate, full-allotment refinancing operations.
The new operational framework, first introduced in 2024, embeds this principle of elasticity: liquidity will be supplied as banks demand it, freeing the ECB from calibrating reserve levels with the same precision once required under asset-purchase regimes. In practice, this means banks will increasingly turn to standard and longer-term refinancing operations, rather than depend on the residual liquidity of legacy bond portfolios.
Schnabel described a gradual sequence ahead. Standard refinancing operations will remain the core liquidity channel. As take-up rises, the ECB will introduce structural longer-term refinancing operations – providing predictable, collateral-backed funding that supports day-to-day liquidity rather than monetary stimulus. Eventually, these will be complemented by a modest “structural securities portfolio,” tilted towards shorter-maturity assets to preserve policy space and limit interest-rate risk.
This approach underscores three priorities: policy stance neutrality, operational resilience, and financial soundness. By reducing duration exposure and maintaining floating-rate symmetry between assets and liabilities, the ECB aims to protect its balance sheet from volatility while retaining the flexibility to respond to future shocks.
The message, ultimately, was one of cautious evolution. Europe’s central bank is not withdrawing from markets but repositioning itself for a steadier, more measured role – one where liquidity provision serves stability, not stimulus. As Schnabel put it, the new Eurosystem balance sheet will be smaller, simpler, and better aligned with the realities of a post-extraordinary monetary era.
