The European Central Bank (ECB) has dramatically cast aside credit standards it imposes on banks seeking loans.
The announced a raft of temporary changes to ease collateral requirements and ultimately make it easier for banks that are make risky loans to continue to borrow from the ECB at rock bottom rates.
The changes mean the ECB will accept riskier loan assets a collateral from banks when they borrow from central banks at rock bottom rates, including risky Greek government bonds but also loans with lower credit quality and foreign-currency loans.
The move is a bid to keep credit flowing to small and mid size enterprises (SMEs) and households in particular amid the economic hit from Covid 19 especially to stricken borrowers who might otherwise be locked out of the market for credit. It’s a sharp contrast to the period of the euro crisis, when regulators repeatedly toughened credit standards required of lenders.
“The measures collectively support the provision of bank lending especially by easing the conditions at which credit claims are accepted as collateral,” the ECB said in a statement.
“The (ECB) is increasing its risk tolerance to support the provision of credit via its refinancing operations, particularly by lowering collateral valuation haircuts for all assets consistently,” it added.
Earlier, two research papers produced by the Central Bank of Ireland indicated that measures that had been taken ahead of Tuesday’s surprise announcement had already freed Irish banks to boost lending by as much as €36bn during the Covid 19 crisis.
Those reports cited in particular the ramp up in quantitative easing (QE) by the ECB, notably €1bn of additional asset purchases by the ECB for the remainder of 2020 which will mean the main Irish retail banks could potentially borrow just in excess of €20bn.
And the Central Bank of Ireland’s own release of the so called Countercyclical Capital Buffer (CCyB) of additional capital banks need to have against their lending from 1pc to zero could boost new lending by €10bn and €16bn, the research found.
The lower capital buffer could also be used by banks to absorb a potentially higher number of customers falling into arrears.