“We take these incidents very, very seriously,” ECB President Mario Draghi told journalists in Frankfurt today. “We’ve decided to create a data quality compliance network and an ECB unit that are responsible for, first monitoring the data quality, by performing regular checks and reports and prompting improvements in national-central-bank processes and procedures, internal controls as well.”
In both cases, the national central banks that are part of the euro system applied smaller-than-usual haircuts to collateral offered by private lenders in return for liquidity.
The Bank of Spain had based its credit-quality assessment of Spanish treasury bills on the ‘A Low’ sovereign rating issued by DBRS Inc. That’s two steps higher than Fitch Ratings and three steps higher than Moody’s Investors Service and Standard & Poor’s. It’s also higher than the ratings the three firms apply to individual bills issued by Spain.
According to ECB rules, issue ratings of securities pledged as collateral take priority over issuer ratings. The ECB takes smaller haircuts on securities with an A-rating, according to the central bank’s website.
The Bank of France said this week a technical problem resulted in the reduced haircut on a “small number of securities” last summer, though the matter was corrected by the end of August.
In the case of Spain “it was a issue of interpretation, this time there were objective technical difficulties that had been addressed by the Banque de France,” Draghi said today. “We are doing everything we can to prevent these incidents and to fix them when they happen.”
“Right now we have to strengthen the governance of this process,” he said. “And then we will certainly reassess the situation after that and see if the steps we have taken were sufficient.”
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