Nov. 20 (Bloomberg) -- The European Central Bank tightened the rules for the collateral it accepts against loans as it tries to restore the “proper functioning” of markets and prepares the ground to unwind emergency liquidity measures.

The bank “will require at least two ratings from an accepted external credit assessment institution for all” asset- backed securities issued from March 1, 2010, the Frankfurt-based central bank said today in an e-mailed statement. In January, the ECB said it required a rating from one credit assessor.

“It’s a small measure but it’s going in the right direction,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “The ECB is just going to be less generous from now on.”

President Jean-Claude Trichet today reiterated the bank will gradually withdraw the emergency cash it has pumped into the economy in order to ensure it doesn’t fuel inflation. He has indicated the ECB won’t renew its 12-month auctions of unlimited cash, one of its flagship policies in the crisis, after a third tranche is handed out next month.

His Belgian colleague Guy Quaden indicated this week that the bank may also offer fewer three-month and six-month loans next year.

In order to tackle the crisis, the ECB has reduced its benchmark rate to a record low of 1 percent, flooded banks with cheap money and started purchasing covered bonds.

Recession Ends

The 16-nation euro region emerged from its worst recession since World War II in the third quarter, expanding 0.4 percent from the prior three months. Confidence in the economic outlook is at a 13-month high and the Dow Jones Stoxx 600 Index has gained 25 percent in the past three months.

The ECB wants “to ensure that the Eurosystem’s requirement of high credit standards for all eligible collateral is met,” the statement said. “In addition, the changes, which reflect recent market developments, aim to make a further contribution to restoring the proper functioning of the ABS market.”

When determining the eligibility of collateral, the ECB said both the “best” and the “second-best” available ratings must comply with the “minimum threshold applicable to asset- backed securities.”

As of March 2011, the so-called second-best rule and the requirements to have at least two ratings will be applied to all asset-backed securities, regardless of their date of issue, the bank said.

To contact the reporters on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net

Last Updated: November 20, 2009 10:52 EST