As Welt reported overnight [9], the ECB just announced a change to its collateral framework, changing the haircuts and acceptability rules for ABS and covered bonds in an attempt to boost moribund and stalled European lending. As part of its announcement, the ECB reduced haircuts applicable to ABS rated A- or higher to 10% from 16% and to 22% from 26%. The bank also cut the minimum rating for ABS subject to loan level reporting requirements to 2 "A" ratings from 2 "AAA" ratings as more and more credit in Europe sinks into the quicksand of NPL-ness. Draghi also announced he would tighten risk control measures for covered bonds and that all the announced changes would have an overall neutral effect on amount of collateral available. Will this latest Hail Mary attempt work to boost lending in Europe? Of course not: Europe's issue is not credit supply constraints but a deterioration in asset quality and an explosion in NPLs, which has lead to an acceleration in overall deleveraging at both the bank and consumer level, and which is unlikely to end any time soon and certainly not before more widespread liability liquidations a la Cyprus.
From the ECB [10]:
ECB further reviews its risk control framework allowing for a new treatment of asset-backed securities
The Governing Council of the European Central Bank (ECB) decided to further strengthen its risk control framework. To maintain adequate risk protection, the ECB regularly adjusts its collateral eligibility rules and haircuts applied when accepting collateral in Eurosystem monetary policy operations. In addition, some measures aim to improve the overall consistency of the framework. At the same time, the list of collateral accepted under the permanent Eurosystem collateral framework will be expanded. These measures taken together have an overall neutral effect on the amount of collateral available.
In the biennial review of its risk control framework applied in Eurosystem monetary policy operations, the Governing Council decided in particular to:
- Update the haircuts for marketable instruments;
- Adjust the risk control measures for retained covered bonds to take into account the additional risk which results from the use of such securities by the issuer itself and to ensure a level playing field between securities with comparable risks;
- Replace the current requirement of two ‘triple A’ ratings with the requirement of two ‘single A’ ratings for the six classes of asset-backed securities (ABS) subject to loan level reporting requirements, reflecting their improved transparency and standardisation;
- Reduce the haircuts applicable to ABS eligible under the permanent and temporary Eurosystem collateral framework.
In addition, the Governing Council has adjusted the eligibility criteria and haircuts applied by National Central Banks (NCBs) to pools of credit claims and certain types of the additional credit claims (ACC) eligible under the temporary Eurosystem collateral framework. The amendments will lead to more consistency of the ACC framework and is expected to generate collateral gains without affecting the overall risk contribution of ACCs.
Besides the adjustments to the risk control framework, the ECB will continue to investigate how to catalyse recent initiatives by European institutions to improve funding conditions for Small and Medium-sized Enterprises (SMEs), in particular as regards the possible acceptance of SME linked ABS guaranteed mezzanine tranches as Eurosystem collateral in line with established guarantee policies.
The Governing Council reserves the right to limit or exclude the use of certain assets as collateral in its credit operations, also at the level of individual counterparties.
These measures will come into force once formalised with the relevant Eurosystem legal acts and/or national implementing provisions.
The related annex announcement:
[11]