ECB loosens lending rules to ease funding stress

Fri Jun 22, 2012 10:26am EDT
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FRANKFURT (Reuters) - The European Central Bank is to start accepting a wider range of collateral in its lending operations and assets of a lower quality, it said on Friday, its second such move in six months to neutralize growing funding pressures on struggling banks.

"The Governing Council has reduced the rating threshold and amended the eligibility requirements for certain asset-backed securities (ABS)," the ECB said in a statement after its mid-month meeting, usually reserved for non-monetary policy issues.

"It has thus broadened the scope of the measures to increase collateral availability which were introduced on 8 December 2011 and which remain applicable."

Asset-backed securities, complex and difficult-to-value financial instruments, were blamed for playing a key role in the financial crisis that followed investment bank Lehman Brothers' collapse five years ago.

The changes, which will be worth over 100 billion euros and come into force in the coming weeks, cover a range of assets.

The ECB said it will start accepting residential and commercial mortgage-backed securities, securities backed by loans to small and medium-sized firms, car loans and leasing and consumer finance ABS, rated as low as BBB-.

Banks will be penalized for using ABS as collateral, ranging from a 16 percent valuation 'haircut' for assets rated in the A band, and up to 32 percent for commercial mortgage-backed securities in the triple-B band.

Up until the end of last year - and in contrast to most forms of collateral - the ECB had been gradually tightening the rules governing the use of ABS.

Prior to the changes, the ECB charged a 16 percent flat rate for using ABS while the minimum quality accepted was A-.   Continued...

A sculpture showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt February 29, 2012. REUTERS/Alex Domanski