More Central Bank Gimmicks Exposed As European Collateral Shortage Deteriorates

Tyler Durden's picture

The epic farce that is the opaque balance sheets of European banks, sovereigns, NCBs, and the ECB, continues to occur under our very eyes. Only when one sniffs below the headlines is the truth exposed with no apology or recognition of 'cheating' anywhere. To wit, following November's farcical over-payment on collateral by the ECB to Spanish banks (that was quietly brushed under the carpet by Draghi et al.), Germany's Die Welt am Sonntag has found that the Bank of France overpaid up to EUR550mm ($720mm) on its short-term paper financing to six French and Italian banks. The reason - incorrect evaluation of the crappy collateral (i.e. the NCB not taking a big enough haircut for risk purposes) on 113 separate occasions. The problem lies in the  increasingly poor quality of collateral the CBs are willing to accept (and the illiquidity of the underlying markets) - as higher quality collateral disappears; which leaves the central bankers clearly out of depth when it comes to 'risk management', no matter how many times Draghi tells us this week.


Via Fox Business:

The European Central Bank continues to have problems with its collateral management, according to a German newspaper report Sunday.


The Bank of France, a member of the European System of Central Banks, has granted too much credit compared with collateral to six banks due to insufficient risk valuation discounts, or haircuts, made on the collateral, reports German newspaper Welt am Sonntag. The Bank provided credit in exchange for bonds known as Short-Term European Paper, or STEP, which it accepted as collateral from the banks, the newspaper says.


According to the report, notes worth less than 6.5 billion euros ($8.5 billion) with maturities of up to one year that were issued by the six banks benefited from risk valuation discounts that were too small. As a result, the banks were able to get up to EUR550 million in additional central bank money without having to provide the corresponding collateral, the newspaper calculates. According to the report, the six banks included French Societe Generale SA (GLE.FR) and Italy's UniCredit SpA (UCG.MI).


The banks had, however, provided sufficient other collateral overall so there was no impact on monetary policy operations, the newspaper quotes the ECB as saying.


An ECB spokeswoman, asked to remark on the report by Dow Jones Newswires Sunday, referred to the fact that there was no impact on the monetary policy operations and said she had no further comments.


Spokespeople at the Bank of France and Euroclear France weren't immediately available to comment to Dow Jones Newswires Sunday.


Within the Eurosystem, the Bank of France provides the relevant data--such as volume, coupon or default risk--on short-term European paper to the ECB. The ECB says it has little information about that market segment and refers to the BOF, according to the newspaper.


According to the ECB, in 113 cases the risk valuation discounts for STEP collateral calculated by the BOF were wrong, the newspaper says.


Bank of France said it gets the data exclusively from Euroclear France, the newspaper reports. Euroclear France belongs to Euroclear Group which also owns Euroclear Bank, itself a big player in the European short-term paper market, that could cause substantial conflict of interest, the newspaper writes.


In recent years, the ECB has substantially expanded the list of securities it accepts as collateral in monetary policy refinancing operations.

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americanspirit's picture

Events are spiraling out of control so fast that the Central Bank clerks simply can't keep up. There is no time for a reasoned evaluation of credit quality - they are just stamping anything that comes across the counter as acceptable collateral. Things are truely circling the drain.

LawsofPhysics's picture

Yes, all the while collecting a modest "fee" for every stamp.  Fuck the paper-pushers and the paper promises.  Got physical  assets of real value?  You better.

knukles's picture

Oh come on, they can always stitch together some new Spiderman beach towels.

TruthInSunshine's picture

Bankruptcy Regime for Nations Urged, bitchez.

And quite coincidental timing, I might add!

DoChenRollingBearing's picture

Make yourself antifragile: buy gold!

silverserfer's picture

what about goats as colateral? They eat ANYTHING and give you all the manure you could wish for!

trav777's picture

nah, they really aren't spiraling out of control that fast.
It's just BAU

DrDre's picture

Thanks goodness that US banks are not like their EEU counterparts ... NOT

Very soon, chinese banks will be hailed as an example of (least worst) transparency. 

And yet, financials are ripping ...


knukles's picture

And Real Money Flees to Russia

Popo's picture

What a farce.  For years now, they've been bragging about Basel III.  Whenever anyone would say "Nothing has changed", the banks would fire back, "Not true!  We have Basel III".   

Except now... they don't have Basel III.   Which brings us back to the original "bullshit" call:  Nothing has changed since 2008.   Not one single thing.   Except for people are poorer, unemployment is up, and food and energy are more expensive.





camaro68ss's picture

Everyone just needs to chill, The new dancing with the starts should be on soon to

Distract the masses


Dr. Engali's picture

In a world of mark to fantasy the collateral is worth what they say the collateral is worth. That $100,000 mortgage that the homeowner hasn't made a payment on in three years is still worth $100,000 in the banker's eyes. At least until they pass it off onto the tax payer at which point they really don't give a shit.

Cognitive Dissonance's picture

"The European Central Bank continues to have problems with its collateral management, according to a German newspaper report Sunday."

What collateral? Fresh toilet paper issued from Central banks (and their captive banks) or the used toilet paper already issued from Central Banks (and their captive banks).

<My head hurts.>

lesterbegood's picture

Jeez, and here I am flushing my used toliet paper down the loo! Hey ECB, Fed, et al! Got some toliet paper for sale here! Slightly used, you pay shipping!

Also some warm turds for sale! Maturity in 2 years when composted in your vaults.

Pairadimes's picture

I love the smell of burning fiat in the morning.

Super Broccoli's picture

so euroclear's no better than S&P rating the shit they're payed to rate ? :-)

Anasteus's picture

Do we know what the new items in the extended collateral list are like? I think once found out one will probably die of laughter.

The definitive solution would be a cyclical collateral chain when a liability is backed by a collateral which, through some other intermediary links, is backed by the same liability.

David Copperfield would turn green with envy over this magic.

Hacksaw's picture

Asset deflation continues to rear it's ugly head. It hasn't and won't go away until it's hunger has been satisfied. All the inane machinations of the money changers won't change anything either. There's only one way to stop the deflation monster and they won't do that because it would lead to run away inflation. All that balancing on a knife edge got them was a split all the way up to their belly buttons.

Clayton Bigsby's picture

I need a French banking license, stat!

Storm Bringer's picture


F - Fix

I - It

A - Again

T - Tomorrow

Darkside's picture

We are so fucked. Noone has any idea to the extent, we can just guess. But we are fucked. It is to the point where you have to scramble to grab what you can before the ship goes down.


There are no regulators. (Just humans milling about collecting paychecks, contemplating and manipulating their next career move)There are no regulations. (Just words on paper justifying regulators milling about collecting paychecks and Lawyers manipulating and billing an industry)

steve from virginia's picture


This is really a gigantic problem that is only going to get worse ... until the lending process breaks down altogether.


A commercial lender gets into trouble by making loans against poor- or non-existent security ... or the borrower is impaired. The problem is leverage -- unsecured loans.


The collateral in the finance/lending system is loans or deposits (currency).


As collateral deteriorates the effective leverage increases, from 10x to 100x or more. At some point the lender is insolvent regardless of his cash-flow position.


For the central bank to take the private lenders' loans onto its own balance sheet is for the central bank to become insolvent as the private lender for the same reasons.


When the public perceives the central bank to be 'just like' the private lenders, there is no effective lender of last resort, no guarantor of currency deposits ... which are then the collateral of last resort for the entire (insolvent) system.


Enter the bank run as depositors remove currency while it is safe to do so. For the depositor to wait and do nothing is for him to lose everything.


This is why there are bank runs in Europe, there no  effective guarantor of deposits no lender of last resort.


This is also why central banks cannot 'print money' or offer unsecured loans. Not only are they ill-equipped to do so (they cannot measure risk or determine credit-worthiness) they have no capital structure and cannot offer anything other than more (unsecured) loans on top of the (unsecured) loans they have already made.

If the public does not trust the central banker after the first round of unsecured loans, why would anyone trust him later? When the deleveraging begins the central bank becomes a spectator, there is no meaningful source of liquidity other than (insufficient) reserves.


The EU sovereign central banks and 'leverage structures' such as ESM are simply money laundries for ECB. The bank runs will intensify ... the end game heaves into view.

orangegeek's picture

The Euro gong show continues.  The Euro shows top and ready to turn down hard.


It's a question of when, not if.

orangegeek's picture

MSM carrying water for the government again.  Frezza is one of the few with the balls to tell it like it is.


Dow Jones daily continues to push up as taxes go up and as deficit goes up.  Q4 results should be absolute shit.  The real issue is going to be the market's reaction to these pending shit results.

Silver Garbage Man's picture

MSM ain't carrying water for the government ....THEY ARE THE GOVERNMENT.

WTFUD's picture


exartizo's picture

Simply put:

The banks are making up the rules as they go along.

Hence the reason that they can and will and do make any real debt disappear pretty much at will.

There is nothing they cannot do with fiat money.


Collateral is not an issue for them.

andrewp111's picture

They will just have to invent the European version of the Trillion Dollar Coin. Snap. Snap. Problem solved, collateral for all.

Neo1's picture

Use federal reserve notes and incur an Irrecusable obligation. The puzzle is complete!!!
A Banksters defeatism (realization of defeat) nightmare, Being forced to Return to Real Money=United States Note=Lawful Money, Use the Remedy within the Federal Reserve Act. Redeemed 12USC411, Refusal Penalty 12USC501a Stop being a Slave!!!!!! This is Tax Free Money!!!!!!
Convincing Congress to Abolish the Fed

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