Goldman On ECB's Collateral Shift: "Total Eligible Collateral Of €15 Trillion Expands By €20 Billion, Or 0.1%"
Yesterday, in a widely leaked move, the ECB announced it was lowering haircut higher rated collateral (and rising haircuts on lower rated collateral) for European banks in a move that is supposed to ease credit channels in Europe and boost lending. But will it? And what is the impact on actual eligible collateral as a result of this move. According to Goldman analysis, the impact of the ECB's move is virtually non-existent (but then why do it?) or 0.1% to be specific. Specifically, what yesterday's announcement does is boost the pool of eligible collateral, estimated at €15 trillion, by €20 billion.
Of course, this is Goldman's very generous estimate. The problem in Europe, as we have long observed, is that "collateral" is not what it seems, and in reality when one nets out the non-viable assets, we expect the real number to be orders of magnitude lower. But for the sake of the ECB, and Europe, we hope to never have to find out. Or else, it will very soon become quite clear that despite reports to the contrary, Draghi was in fact accepting both Olive Oil and Feta as eligible collateral...
From Goldman's Jernej Omahen
We have analyzed the impact of the ECB’s collateral changes on European banks. Overall, we conclude that yesterday’s announcements are largely neutral. Announced changes expand ECB eligible collateral by €20 bn, or roughly 0.1% of the (theoretical) total of currently eligible collateral (€15 tn) and 0.9% of currently posted collateral (€2.3 tn). In the context of system liquidity, these are small figures.
Spain and Italy: Forward looking changes
We estimate that reducing haircuts on highly rated (A- or higher) collateral will result in a liquidity release of €4 bn for Italian and €3 bn for Spanish banks. However, a rating downgrade would reduce the amount of ECB liquidity, where sovereign paper is the underlying collateral, by €30 bn for Italian and €22 bn for Spanish banks. The total impact would be greater, as the credit ratings of non-sovereign entities would likely suffer too. A downgrade by DBRS – the last rating agency to assign an A- rating to Italy and Spain – would trigger this liquidity drawdown.
That said, the recent evolution of ECB facility usage suggests that banks are less reliant on this source of funding. Any change is unlikely to result in a substantial hit to the banks, in our view. Consider that the Spanish ECB facility usage has declined from a peak of €412 bn in August 2012 to €253 bn currently (a reduction of €159 bn, or 39%). For Italy, the peak ECB facility usage was reached at €283 bn in July 2012, but has now declined to €256 bn. In the event of a credit-rating downgrade by DBRS, the potential drawdown of available ECB liquidity, as a consequence of these changes, is therefore 8% of current usage for Spain and 12% for Italy, on our estimates.
Measures to spur SME credit availability?
Our economists believe that the part of the ECB announcement relating to “possible acceptance of SME-linked ABS guaranteed mezzanine tranches” could be preparing the way for further measures to spur SME lending. For example, the EIB, ESM or national governments could provide such guarantees, making a higher portion of SME lending eligible for ECB refinancing. In practice, this would allow banks to extend SME credit with support on the capital and risk as well as funding side – presumably an attractive proposition.
Pragmatically, we see an ECB move in this direction as “headline positive” but unlikely to spur banks into a substantial change to their approach in funding SMEs. The reasons for this are: (1) recourse to the ECB still carries a substantial stigma with investors continuing to focus on ECB facility usage by individual banks; with banks racing to repay LTRO funds, incentivizing them to make higher usage of ECB facilities is likely to be met with skepticism, in our view; (2) while banks stand to make attractive returns if all ends of a lending transaction are subsidized – capital (as guarantees would reduce RWA), credit losses (through guarantees) and funding (ECB) – they have shied away from extensive carry trades in the past (which meet all of these criteria today); and (3) finally, we tend to agree with banks that quote “low credit demand” as the key element in recent credit growth dynamics.
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