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ECB Amends Rule on Bank Bonds Guaranteed by Program States

The European Central Bank said euro-area national central banks are no longer obliged to accept as collateral bank bonds guaranteed by member states receiving aid from the European Union and International Monetary Fund.

Banks in the three bailed-out countries -- Greece, Portugal and Ireland -- that have difficulty pledging adequate collateral for ECB loans can use bonds they have issued as long as they are guaranteed by their governments. While the ECB’s decision, taken on March 21 and activated today, means other euro-area central banks don’t have to accept those bonds as collateral, the banks typically seek the loans via their own central banks.

“The Portuguese, Irish and Greek central banks are unlikely to suddenly reject such bonds as collateral and destabilize their respective banks,” said Christian Schulz, a former ECB economist now working for Berenberg Bank in London. “Banks may have difficulty trying to get money from the Bundesbank with those bonds, but that was never their first port of call anyway.”

The ECB has loosened its collateral criteria and loaned banks more than 1 trillion euros ($1.3 trillion) for three years to fight off a credit crunch, prompting Bundesbank President Jens Weidmann to write a letter to ECB President Mario Draghi warning about the risks the central bank is taking. Weidmann has also called on policy makers to start planning for the eventual withdrawal of the emergency lending measures.


Former ECB chief economist Juergen Stark this month described the quality of the collateral on the ECB’s balance sheet as “shocking.”

In the amendment published today, the ECB said central banks are also not obliged to accept bank bonds guaranteed by a member state “whose credit assessment does not comply with the Eurosystem’s benchmark for establishing its minimum requirement for high credit standards.”

“This is not really relevant for the euro area as a whole, it’s more of a symbolic act,” said Christoph Rieger, head of interest rate strategy at Commerzbank AG in Frankfurt. “Those central banks who benefit from this rule will rarely be offered any toxic collateral.”

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