ECB Securities-Lending Demand Rises for German, Italian Debt

  • Clearstream says demand has picked up since late-2015
  • Bundesbank, Bank of Italy use Clearstream lending facilities

Banks have stepped up their use of the European Central Bank’s securities-lending program to get hold of German and Italian debt, according to Clearstream Banking SA.

The assets have been purchased under the ECB’s quantitative-easing program and made available to investors by Germany’s Bundesbank and the Bank of Italy via Clearstream. Demand increased in November and December and has remained buoyant since then, said Richard Glen, the clearing house’s head of global securities-financing sales for the U.K., Ireland and the Americas.

The securities-lending programs are designed to prevent liquidity drying up in the euro region’s debt markets by allowing financial institutions to temporarily exchange bonds they own for those the national central banks bought under QE. Because the system was designed as a backstop for the repurchase agreement, or repo, market the central banks’ lending rates are more expensive than general collateral repo rates.

“Demand for high-quality liquid assets has continuously grown,” Glen said in an interview in Luxembourg. “The demand on the program is not only for specific assets but also generally for HQLA. Counterparties are willing to pay a premium."

Asset Squeeze

With the ECB coordinating the purchase of 60 billion euros ($65 billion) of debt each month, concern is growing that there won’t be enough bonds left for banks and investors to use as collateral for regulatory requirements and short-term funding. A mooted expansion of QE as soon as March would exacerbate the problem.

Regulatory requirements for high-quality assets have boosted demand from banks for these liquid securities, particularly around year-end reporting times. After 11 months of the ECB’s asset-purchase program, and about 128 billion euros of German debt and 88 billion euros of Italian securities bought, banks are turning to the central banks to access the bonds that are harder to obtain in the repo market.

The NCBs’ programs, which were introduced last year in the wake of the ECB’s bond-purchase plan, have been criticized for being too fragmented, with each central bank implementing different rules, prices and means of access. The Bundesbank and Bank of Italy make their bonds available using Clearstream’s existing lending facilities, designed to mitigate against settlement failures.

Harmony Needed

Andreas Jobst, a senior economist in the European department of the International Monetary Fund, said the lending programs need to have more harmonized terms and conditions. The requirement for non-cash collateral avoids the so-called sterilization of the securities-lending market but does nothing to increase the availability of collateral, he said at Clearstream’s global securities-financing summit on Jan. 27.

“We are satisfied with the acceptance by the market,” a Bundesbank spokesman said. The ECB doesn’t publish data on the usage of the securities-lending programs. Bank of Italy officials weren’t immediately available to comment.

The instruments are meant to “allay the market’s concerns around a potential collateral shortfall,” and NCBs have been “pragmatic” in setting them up, Clearstream’s Glen said.

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