Today the ECB surpirsed everyone with changes to it’s rules of egilible collateral. The following things were changed:
First, the Eurosystem has abolished the eligibility requirement (Sections 220.127.116.11 and 18.104.22.168) that debt instruments issued by credit institutions, other than covered bank bonds, are only eligible if they are admitted to trading on a regulated market.
So in plain English: The ECB now also accepts any debt instrument issued by banks even though they are not traded on regulated market and thus do not come with a market price. This is a mayor relaxation of colleteral standards. Cynics might claim that markt-to-fanansy enters the Euro monetary system.
The second change is a thightening of standards
At the same time, the Eurosystem risk control measures for marketable assets (Section 6.4.2) have been amended. Specifically, the Eurosystem has reduced the limit for the use of unsecured debt instruments issued by a credit institution or by any other entity with which the credit institution has close links. Such assets may only be used as collateral to the extent that the value assigned does not exceed 5% of the total value of collateral submitted (instead of 10%, as previously stipulated).
The ECB apparently wants to reduce it bank exposure in the collateral. That’s a statement of distrust into the European banking system. This rule change will lead to a reduction of unsecured bank issued collateral that will be replaced by the extra collateral of change number 1. This will be secured, but not traded, bank issues. I think both changes together will lead to a net increases the collateral value.
Interesting is a third change in a foot note of the document:
Second, the introduction of a common minimum size threshold applicable to all eligible credit claims throughout the euro area has been postponed to 2013 (Section 22.214.171.124).
As I pointed out previously, the national banks have different standard on the minimum size of eligible credit claims. These were scheduled to be harmonized end of this year. However, with this change it is postponed for two years. It’s hard to see which parctical implication this threshold has, but it opens way to regulatory arbitrage. From my previous post:
In practice this means that some collateral may be eligible in some countries only. Banks might find a way to arbitrage on that. E.g. a German bank could provide it’s Irish branch with collateral that is eligible in Irland, but not in Germany. The Irish branch, in turn, could post it as collateral to get credit from the Irish national bank and return the money to its German headquarters. This would lead to a negative Target-2 balance of Ireland and a positive for Germany. However, this wouldn’t be caused by money Ireland received by the ECBS. It is a direct result of the differences in the collateral accepted. Note: I’m not saying these kind of transaction are actually taking place. I have no information on this. However, if it’s easy and banks benefit from it, than I wouldn’t see it as far fetched.
I think that the ECB tried to give (a) the PIGS more time to adjust (change 3) and (b) reduce its exposure to the banking system.
Update 16:38 CET
According to this press release of the ECB the changes will become effective as of 1st of January 2012. So banks have some time to adopt. Banks that relied on unsecured bank bonds as collateral might see some strain on their liquidity situation in the coming months.
- Stealth-Bailout: Why Sinn is Only Partially Right, But Things Might Be Even Worse (verlorenegeneration.de)
- Target-2: Is Sinn „Right on Target“? (verlorenegeneration.de)