Monday 11 December 2017

Collateral rule changes to make ECB cash more accessible

Laura Noonan in Frankfurt

€100m

The amount Irish banks could save by pledging loans to the European Central Bank

FINANCE

THE European Central Bank is relaxing its collateral rules once more in a bid to make cheap cash even more readily available to banks so they will finally start lending to the "real economy".

The measures announced yesterday will allow banks of seven countries, including Ireland, to use up to €200bn of previously-ineligible assets as collateral when the ECB offers its next batch of three-year funding at the end of the month.

"The purpose is to finance the real economy and especially SMEs," ECB President Mario Draghi told reporters yesterday, admitting that his institution was "taking on more risk" but insisting that risk was being "well managed".

Mr Draghi also admitted that the decision to ease the collateral rules had not been "unanimous" amongst the ECB's 23-man governing council but said it had not been a "particularly contentious" issue.

Later, it emerged that Germany's powerful Bundesbank voiced concerns about the new measures, which will see the ECB accept ordinary loans as collateral for the first time.

Accepting ordinary loans is seen as riskier than accepting bonds or batches of securitised loans since there is no quoted market for 'naked loans' so it is harder to value them.

Mr Draghi yesterday said that national central banks in the seven countries involved would be responsible for evaluating the "creditworthiness" of loans offered and that the ECB's governing council would also "evaluate" each country's proposals.

The ECB will be protected because it will require banks to put up collateral worth more than twice what they draw down. The situation will be "reviewed" in six months.

The move will immediately reduce the funding costs for banks who had run out of ECB-eligible assets and resorted to pledging loans with their national central banks for expensive Emergency Liquidity Assistance (ELA).

Davy's analyst Stephen Lyons last night predicted Irish banks could save an extra €100m a year by pledging loans to the ECB instead of creating 'own-use' bonds which trigger a fee to the Government.

The new ECB rules swing into place in time for the ECB's end-of-February offering of ultra long-term money that banks can keep for up to three years.

The first three-year operation back in December doled out about €500bn, and Mr Draghi yesterday said that demand could "possibly" be equalled in the next instalment.

Despite that massive influx of cheap cash, lending remained tight across the eurozone in December. Mr Draghi said the December lending figures were a "concern" but did not reflect the full impact of the three-year money.

He also stressed, however, that while the funding was a useful tool to help banks, the measures were of a "temporary nature".

The ECB typically offers cash for a maximum of 90 days.

Irish Independent

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