ECB to phase out out easy bank collateral rules

The European Central Bank (ECB) announced on Thursday it will end most of the relaxed bank funding rules it introduced in response to the coronavirus pandemic.

The ECB will tighten banks’ access to its liquidity from July by phasing out the exceptionally easy collateral rules introduced near the start of the pandemic.

The relaxed rules were designed by the ECB to help avoid the pandemic turning into a European debt crisis.

The rules increased by about €240 billion the collateral that banks were able to deploy to raise cheap funds from the ECB.

The central bank said that its pandemic collateral easing measures introduced in April 2020 will be gradually phased out in three steps between July 2022 and March 2024.

It said the “step-wise phasing out” of the measures will gradually restore the Eurosystem’s pre-pandemic risk tolerance “and avoid collateral availability cliff effects.”

The ECB said however it will continue to allow national central banks to accept as eligible collateral Greek government bonds (GGBs) “that do not satisfy the Eurosystem’s minimum credit quality requirements.”

Earlier this month, the ECB accelerated the reduction in its bond-buying monetary stimulus.

The ECB said then it would reduce its monthly net purchases under the asset purchase programme (APP) to €40 billion in April, €30 billion in May and €20 billion in June.

The central bank said it could stop adding to its existing €4.6 trillion bond portfolio in the third quarter “if the incoming data support the expectation that the medium-term inflation outlook will not weaken even after the end of our net asset purchases.”

It said the separate €1.85 trillion emergency bond-buying scheme — the pandemic emergency purchase programme (PEPP) — will stop net purchases as planned at the end of March.

On Thursday, the ECB said in a statement: “The Governing Council of the European Central Bank (ECB) has decided to gradually phase out the package of pandemic collateral easing measures in place since April 2020.

“The Governing Council has taken into account in a forward-looking manner the impact of this gradual phasing out on the collateral availability of Eurosystem counterparties, in particular with regard to their ability to continue mobilising collateral until the maturity of the outstanding targeted longer-term refinancing operations (TLTRO III).

“Moreover, it has considered the risk impact of each of these measures.

“This gradual phasing out allows ample time for the Eurosystem’s counterparties to adapt, and is scheduled to take place in the following three steps.

“Step 1 From 8 July 2022 the ECB will implement a set of decisions.

“First, it will halve the temporary reduction in collateral valuation haircuts across all assets from the current 20% adjustment to 10%.

“Second, the ECB will no longer maintain the eligibility of marketable assets that fulfilled minimum credit quality requirements on 7 April 2020 but whose credit ratings subsequently deteriorated below the minimum rating threshold.

“Third, the ECB will restore the limit with respect to unsecured debt instruments issued by any single other banking group in a credit institution’s collateral pool from 10% to 2.5%, as was the case before April 2020.

“Fourth, the ECB will phase out the temporary easing of certain technical requirements for the eligibility of additional credit claims (ACC), mainly relating to fully restoring the frequency of the ACC loan level reporting requirements and the acceptance requirements for banks’ own credit assessments from internal rating-based systems.

“The relevant national central banks will communicate the details to the affected counterparties.

“Step 2 In June 2023 the ECB expects to implement a new valuation haircut schedule based on its pre-pandemic risk tolerance level for credit operations, phasing out the remaining general 10% reduction in collateral valuation haircuts.

“Details of the new haircut schedule will be announced in due course and will take into account the results of the forthcoming regular review of the ECB risk control framework.

“Step 3 In March 2024 the ECB will in principle phase out the remaining pandemic collateral easing measures, following a comprehensive review of the ACC frameworks that will take into account counterparties’ collateral needs for their continued participation in the outstanding TLTRO III operations until December 2024.

“These measures include the acceptance of various ACCs introduced during the pandemic period, such as loans guaranteed by the government and certain public sector entities.

“Notwithstanding this, national central banks may decide to terminate (parts of) their ACC framework early.”

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Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.