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Is The ECB's Collateral Pool Expansion A €7.1 Trillion Imminent "Trash To Cash" Increase In Its Balance Sheet?

Tyler Durden's picture




 

While a lot of the just completed Draghi press conference was mostly fluff, the one notable exception was the announcement that the European central bank would "approve eligibility criteria for additional credit claims" (see below). While purposefully vague on the topic, Draghi noted that the step is one of onboarding even more risk: "Sure, it's going to be more risky. Does that mean that we take more risk? Yes, it means we take more risk. Does it mean this risk is being unmanaged? No, it is being managed. And it's being - it's going to be managed very well because really there will be a strong overcollateralization for the additional credit claims. The conditions will be very stringent." While it remains to be seen just how stringent the conditions will be, but a bigger question is what is the total pool of eligible claims that can be used to flood the ECB in exchange for freshly printed cash. For that we go to Goldman, whose Jernej Omahen a month ago calculated the impact of the expanded collateral pool which was formally confirmed today. To wit: "Scarcity of collateral was becoming an evident problem for a large number of banks, especially smaller and medium sized. In our view, the ECB’s collateral pool expansion was therefore a critical decision. Select corporate loans – which form over >€7 tn, or >30% of total balance sheets – will now be admissible for refinancing operations, through national central banks. Criteria on eligibility have yet to be determined – we are therefore not able to quantify the actual expansion of collateral pool at this stage. That said, the €7 tn starting points suggests it will be significant." In other words, and this is excluding anything to do with the LTRO, the ECB just greenlighted a potential expansion to its balance sheet all the way up to €7 trillion. Will banks use this capacity to convert "trash to cash" - why of course they will, and this goes to the very heart of the biggest problem with Europe: the fact that there are virtually no money good assets left as collateral, which requires the implicit rehypothecation of bank "assets" back to the ECB, to procure cash, to pay out cash on very real liabilities. How much will they do - we don't know yet. We will find out very soon. What we do know is that the ECB's €2.7 trillion balance sheet is about to expand dramatically, pushing the European central bank even further into bad bank status. And this is excluding the upcoming new usage of the Discount Window known as the LTRO in three weeks. Trade accordingly.

From the ECB:

9 February 2012 - ECB’s Governing Council approves eligibility criteria for additional credit claims

 

The Governing Council of the European Central Bank (ECB) has approved, for the seven national central banks (NCBs) that have put forward relevant proposals, specific national eligibility criteria and risk control measures for the temporary acceptance of additional credit claims as collateral in Eurosystem credit operations. Details of these specific national measures will be made available on the websites of the respective NCBs: Central Bank of Ireland, Banco de España, Banque de France, Banca d’Italia, Central Bank of Cyprus, Oesterreichische Nationalbank and Banco de Portugal.

 

These developments follow up on the decision of the Governing Council of 8 December 2011 to increase collateral availability by allowing Eurosystem NCBs, as a temporary solution, to accept additional performing credit claims as collateral.

 

Eurosystem NCBs continue to work on developing specific national eligibility criteria for additional credit claims. Any further Governing Council decisions in this respect will be communicated through the monthly publication “Decisions taken by the Governing Council of the ECB (in addition to decisions setting interest rates)” and announcements made by the respective NCBs. Eurosystem counterparties are invited to contact their respective NCBs to obtain further details on the specific national eligibility criteria for additional credit claims. The general Eurosystem eligibility criteria for credit claims, as stipulated in the publication “The implementation of monetary policy in the euro area: General documentation on Eurosystem monetary policy instruments and procedures” remain unchanged.

And this is what Goldman, apropos the firm from which Mario Draghi graduated, said on the question of credit claim expansion vis-a-vis the ECB:

Expanded collateral pool: A necessary measure

 

Scarcity of collateral was becoming an evident problem for a large number of banks, especially smaller and medium sized. In our view, the ECB’s collateral pool expansion was therefore a critical decision. Select corporate loans – which form over >€7 tn, or >30% of total balance sheets – will now be admissible for refinancing operations, through national central banks. Criteria on eligibility have yet to be determined – we are therefore not able to quantify the actual expansion of collateral pool at this stage. That said, the €7 tn starting points suggests it will be significant. The collateral pool expansion has two elements.

 

(1) Bank loans will be temporarily accepted as collateral. This will be done via the respective national central banks, after the relevant legal acts are published. We note:

  • 65 of the largest European banks have exposure at default (EAD, a balance sheet proxy) of €22.5 tn. Of this amount, €6.4 tn are corporate loans and a further €691 bn are SME loans. Together, they account for €7.1 tn or 31% of the EAD total. For banks in Italy, this proportion is highest (43%).
  • It is unclear how much of this €7.1 tn will ultimately qualify as collateral. That depends primarily on the size threshold (for individual loans) and the minimum IRB rating. The responsibility for setting these will be with individual central banks. But preliminary expectations are for some 20%-50% of corporate loans qualifying as collateral, before the haircuts are applied.

We also note that a new source of collateral is likely to encourage banks to fully pledge their existing collateral amounts, in our view. Currently, banks hold meaningful portions of ECB collateral on the sidelines, as a precautionary measure.

 

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Thu, 02/09/2012 - 10:53 | 2141487 misterc
misterc's picture

Mario Havenstein fighting relentlessly against money shortages

Thu, 02/09/2012 - 10:58 | 2141512 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Damn these windmills!

Thu, 02/09/2012 - 10:54 | 2141495 Fourth Reich
Fourth Reich's picture

I love it.

 

Here in Germany the sheeple are so very happy that "the ECB ios not printing".

 

Would be shades of the Weimar Republic all over, otherwise.

 

When the German sheeple learn, we will see blood. Sometime. Other people's blood.

Thu, 02/09/2012 - 11:00 | 2141520 LongBalls
LongBalls's picture

I heard that Germany reactivated the Sonderfonds Finanzmarktstabilizerung (soFFin)? This is significant as it means that Germany is going to let it's banks off load toxic Euro assets.

Something HUGE cometh......Either Germany is leaving the Euro or it's Greece. No matter what things are about to get even more interesting!

 

 

 

Thu, 02/09/2012 - 11:04 | 2141536 Gief Gold Plox
Gief Gold Plox's picture

But of course the ECB is not printing, they're just expanding their balance shits. Expansion just sounds so good, and besides... printing requires loads of ink, paper, printers, time and whatnot.

"INSERT INTO Euro.Moneh VALUES( ShitLoad )" is just so much cleaner and easier.

Thu, 02/09/2012 - 10:55 | 2141499 mushioov
mushioov's picture

(!) My post was deleted? Wuts happening

Thu, 02/09/2012 - 11:05 | 2141508 falak pema
falak pema's picture

you lost your tongue in cheek so pull it out and bring it to print. 

Mario man sees big, that's the sign of a true scam, the bigger the better. Never scam cheap, you never get away with it. Ask Trichet, he lived up to his name!

The true question to this 7T limit is : Is big Euro capital (Siemens, MBenz, VW, LMVH, L'Oreal, Total, Shell  etc.) backing up this ECB play with their OWN money???

Thu, 02/09/2012 - 10:56 | 2141501 SDRII
SDRII's picture

circling the drain. Albert Edwards:

“The pygmies that populate the political and monetary elites prefer to genuflect to the court of public opinion in a pathetic attempt to deflect blame from their own gross and unforgivable incompetence”

 

ft alphaville.

Thu, 02/09/2012 - 10:56 | 2141505 knight99
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how can one trade in these conditions besides shorting the Euro. Buying Gold/Silver also a really good start.

Thu, 02/09/2012 - 11:04 | 2141535 nolla
nolla's picture

Well, at least Nasdaq seems to be really overbought, of course, it can be more overbought, but not too much. As of this morning's open, the 14 days RSI printed about 80.6. During the prior 4 years period RSI has printed figures north of 80 only once - around mid-April 2010. It was the top then, followed by flash crash.

There could be higher prints before 2008, but then the markets were also functioning. Anyhow, RSI north of 80 is rare, and once it goes there, it won't stay there.

I'll add to my hedges.

Thu, 02/09/2012 - 11:10 | 2141585 nolla
nolla's picture

I double checked, north of 80 only on april 2010 and now. Unfortunately my data is for weekly basis for longer periods, but it seems that during the last decade, only 2 observations for 80+....

Going back to the screen...

Thu, 02/09/2012 - 11:00 | 2141523 Peter K
Peter K's picture

Yea, but it's the good Euro's. It not like those bad USD's :)

Thu, 02/09/2012 - 11:01 | 2141526 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

They're going to double their balance sheet.  Which means the Fed will have to double their balance sheet.

This is like watching two fat kids eat a whole cake each while their parents cheer them on to out-eat the other kid.

Thu, 02/09/2012 - 11:39 | 2141785 1eyedman
1eyedman's picture

extend and pretend.   its a viscous cycle if they cant pull up--magically grow.     but what if there IS growth and these excess reserves start getting into the economy, inflation potentially a lot; raise interest rates, but on fantastic amounts of s/t debt US and EU, the money to cover debt payments will rise dramatically.

its a no win situation.  the only winners, natch, will be people in power/elites whose nominal income needs are met 100x over.  only the regular people, furthering the road to serfdom. 

once people or an entity gains power, they do not relinquish it willingly--hence tptb will kick the can until it doesnt work.   so the true key to observe is the diminshing returns on each kick of the can; each QE; each agreement until equity mkts or debt mkts cease to react due to frontrunning the known outcome/agreement/qe/etc.   

the technical pattern, rising wedge, is the embodiment of diminshing returns.   sept/oct 2007 and may 08 and nov 08 were all rising wedges.  best outcome is a 60% giveback from the start.  worst case is cascade down.  tends to be a 'short sharp shock'  as one might say.

Thu, 02/09/2012 - 11:02 | 2141528 youngman
youngman's picture

"how can one trade in these conditions "......exactly..when the conditipns change every day...just today we have an additional 50 billion pounds from England....and 170 billion to Greece...and potentially 5 trillion from the ECB......now folks....this is a lot of money for just one day....but markets seem to calm....or maybe the markets are shut down ...no more retail investors...but the BOTS are working on their software for the new total amounts...I don´t know anymore...but I do know its print print print....until it falls apart...and what does a country like South Korea do....or Brasil...Russia, China...do not forget about them....

Thu, 02/09/2012 - 11:14 | 2141606 LongBalls
LongBalls's picture

Brazil, Russia, and China are buying gold. Furthermore, Russia and China are defending the

remaining oil in the Middle East from futher US domination (aka dollar prop). Realize this. We are watching a global shift in finance. What is the outcome?..............

Thu, 02/09/2012 - 11:02 | 2141530 RSDallas
RSDallas's picture

This will be the ULTIMATE wash and rinse exercise in fraudulent money laundering ever to be witnessed in the history of mankind.  Abracadabra, Hokuspokus and Puff The Magic Dragon will make the world right again. 

Thu, 02/09/2012 - 11:04 | 2141540 DutchMadness
DutchMadness's picture

As helicopters are not available due to bad weather-conditions, banksters from the EU Garlic countries - including Greece - are already standing in line at the ECB Frankfurt Headoffice to get fresh billons of cash for their worthless goodies.

Thu, 02/09/2012 - 11:09 | 2141580 Bullwinkle Moose
Bullwinkle Moose's picture

This will all end is disaster. Every time the ante is upped, the more is due the fiddler. Paper money will become as worthless as grains of sand.

Thu, 02/09/2012 - 11:23 | 2141682 PaperBear
PaperBear's picture

“convert "trash to cash"” – convert your cash to physical silver.

Thu, 02/09/2012 - 11:48 | 2141826 bnbdnb
bnbdnb's picture

What's stopping me from loaning myself 5b and using it as collateral to get 50b?

Thu, 02/09/2012 - 12:19 | 2141992 Bullwinkle Moose
Bullwinkle Moose's picture

Only the Fed can act so immorally. Us, on the other hand, will be sent to prison.

Thu, 02/09/2012 - 11:53 | 2141858 Dermasolarapate...
Dermasolarapaterraphatrima's picture

BOE expands QE:

 

The Bank of England boosted its asset buying program by £50 billion, to £325 billion, in line with economist expectations. However, the BOE also noted that it expected "significant" weakness to continue to plague the U.K. economy. Benchmark interest rates were held steady at 0.5 percent.

 

http://www.businessinsider.com/god-save-the-qe-bank-of-england-expands-a...

Thu, 02/09/2012 - 12:23 | 2142019 reload
reload's picture

Traslation: We care not for your savings in Pounds Sterling, We care not for your ever decreasing purchasing power or standards of living and we laugh at out own inflation target. We do not dare punish bankers for missallocation of capital and we do not care that they can profit from it. We have NO shame, compassion & credibility.

Will the last person to flww the country please turn the lights out.

Merv the swerve.

Thu, 02/09/2012 - 12:09 | 2141946 Canucklehead
Canucklehead's picture

This is needed in order for the AAA Euro countries to leave the Euro.

Clearly the ECB is a bad bank that will go bankrupt.  Various Euro countries will see that their banking systems will swap foreign euro debt for domestic euro debt and batten down the hatches.

In the aftermath of the ECB bank failure, the various countries will cover their domestic debt held by the ECB to limits granted by their respective national governments.

Expect a return of strong national leadership within the various EU countries as the game will get rough.

Those EU countries who cannot backstop their ECB held debt will see their sovereignty impaired as recovery teams take charge.

Thu, 02/09/2012 - 13:01 | 2142284 slewie the pi-rat
slewie the pi-rat's picture

(paste):  Eurosystem NCBs continue to work on developing specific national eligibility criteria for additional credit claims. Any further Governing Council decisions in this respect will be communicated through the monthly publication “Decisions taken by the Governing Council of the ECB (in addition to decisions setting interest rates)” and announcements made by the respective NCBs. Eurosystem counterparties are invited to contact their respective NCBs to obtain further details on the specific national eligibility criteria for additional credit claims.

L0L!!!  these banks are gonna be tougher than scrappyDoo for at least a week!

ECB = badBanque 

this is the global insolvency problem, isn't it, sportzFanz?  all the talking fuktardio-heads and pols and "economists" talk about "contagion" but having LSZombieProgrammes is proving to be quite effective at sucking the life outa damned near everything!

once you're on the morphine drip, who cares about contagion?  entire continents have blastularCurrencyCarcinomae, resulting in wickedFiatFlatulence and we are being "advised" to be concerned about possible "contagion"?

Hahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahah

Thu, 02/09/2012 - 13:02 | 2142288 slewie the pi-rat
slewie the pi-rat's picture

can anyone understand that chart?

Thu, 02/09/2012 - 13:16 | 2142367 slewie the pi-rat
slewie the pi-rat's picture

warning:  trying to 'rescue' zombies who are 'too big' may result in the getting dragged down, yourself! 

be careful out there, lil pardnerz!

if they fell in the drink offa the SSgoodShipRepealglass/steagall, we could all try singing:  "eternal BEing, strong to save, deliver us from the watery grave..."  amen

once more, with feeling...

coda:

  • let
  • them
  • fail
Mon, 02/13/2012 - 16:05 | 2154806 maxw3st
maxw3st's picture

One can only wonder when this massive QE will begin to get priced into the Euro.

Sun, 02/26/2012 - 14:34 | 2198201 Trichy
Trichy's picture

So ECB=Bad Bank. Germany leaves who is holding the bag?

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