ECB Decision on Collateral Rules Draws Bundesbank Rebuke
As Spanish banks scramble for collateral to use in the refinancing operations that are keeping them afloat, the Frankfurt-based ECB said it will cut the rating thresholds and amend eligibility requirements for some asset-backed securities. While the move will give stressed banks greater access to ECB liquidity, it may also increase the amount of risk on the central bank’s balance sheet.
“We’re critical of this,” Bundesbank spokesman Michael Best said yesterday. In terms of collateral, “we won’t accept what we don’t have to accept,” he said.
The criticism highlights one of the fault lines dividing European officials as they struggle to end a crisis threatening to rip the currency union apart. As Draghi’s officials scramble to put together policies that will fight the latest stage of the turmoil, German policy makers are emphasizing the dangers of pursuing unorthodox policies that potentially put taxpayers on the hook for future losses.
“It’s almost the usual game: the ECB has to do something to alleviate a liquidity crisis and the Bundesbank isn’t very happy about it,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a telephone interview. “The Bundesbank being critical doesn’t fully counteract what the ECB is doing, but possibly makes it a little less effective.”
Looser collateral is the latest issue to divide Europeans days before a summit that Italian Prime Minister Mario Monti said must succeed or risk a bond-market selloff. German policy makers are reluctant to put too much on the line to help debt- strapped nations before they fix their budgets and banks. French and Italian leaders are pushing for a wider range of crisis- fighting tools.
Those debates have flared on the ECB’s Governing Council too. Two years ago, the German central bank came out and opposed the ECB’s unprecedented decision to buy the bonds of distressed nations as part of a broader push to stamp out a crisis that was starting to spread from Greece. While the German central bank ultimately went along with the plan, it has since been largely shelved and deemed ineffective by most ECB officials.
In February, Bundesbank President Jens Weidmann wrote to Draghi warning of the risks the ECB is taking in lending more than 1 trillion euros ($1.3 trillion) to banks. The ECB’s Target2 system, which calculates debts between the euro region’s central banks, shows that the amount owed to the Bundesbank has soared as Germany helps fund the region’s most indebted nations.
Earlier this year, the German central bank shunned another measure aimed at easing collateral requirements.
The ECB’s latest announcement is a “clear sign that the Bundesbank opposes any further increase in risks on the euro system’s balance sheet,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London.
Draghi says that the money the ECB has pumped into the banking system prevented what he called earlier this month a “more serious credit crunch and possibly more serious disruptions.”
In its statement yesterday, the ECB Governing Council expanded the pool of securities eligible as collateral with a lower threshold.
Residential mortgage-backed securities and loans to small and medium-sized enterprises rated at least BBB- at Standard & Poor’s will now be accepted with a valuation haircut, or risk premium, of 26 percent, the ECB said. The previous minimum rating on such securities was A-.
Auto loan, leasing and consumer finance asset-backed securities and those backed by commercial mortgages with a second-best rating of at least A- at Standard & Poor’s will now be eligible with a haircut of 16 percent, the ECB said.
Commercial mortgage-backed securities with a second-best rating of at least BBB- from S&P would face a haircut of 32 percent, according to the statement.
The “risk control framework with higher haircuts applicable to the newly eligible ABS aims at ensuring risk equalization across asset classes and maintaining the risk profile of the Eurosystem,” the ECB said in the statement.
“This is a case of the ECB having to do something to ensure that liquidity keeps flowing into the euro-zone banking system,” said Peter Dixon, an economist at Commerzbank AG in London. “It’s a solid reminder to those who say the ECB is not doing enough.”
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