Here's an interesting addition, via Izabella Kaminska at FT Alphaville, "Turns out that not all the national central banks of the European System of Central Banks (ESCB) are so keen on widening collateral criteria, especially the idea of taking on more bank loans (tweaking the eligibility of credit claims) in exchange for central bank lending." (Let there be credit claim collateral… just not everywhere.)
Feb. 1 (Bloomberg) — The European Central Bank’s plan to accept more bank loans as collateral may not be used by all euro-region nations, threatening to fragment the rules applying to bank funding operations, said two euro-area officials with knowledge of the discussions. The initiative is likely to be implemented on a voluntary basis by national central banks and several of them may opt out, said the officials, who declined to be identified because the information is confidential.
Germany’s Bundesbank has indicated it may be among those to shun the measure, arguing the country’s banks don’t need to borrow more from the ECB. An ECB spokesman declined to comment.
FRANKFURT — Banks in the euro area cut lending sharply at the end of 2011, according to data published Wednesday... A quarterly survey of commercial banks by the European Central Bank showed a surge in the number of institutions that were becoming more restrictive about who they lent to, because the banks themselves were having trouble raising money and were under pressure from regulators to reduce risk.
When you hear talk about expanding the European LTRO funding, it is important to go straight to the mechanics of the exercise, and then ask what does the new round of exposure mean to the ECB.
The LTRO is a repo transaction where the ECB takes in collateral in order to back any loans. The ECB will swap cash in exchange for questionable assets so that insolvent banks can replace funding caused by de facto bank runs. If they choose, they can then double down on sovereign bets, or pay off creditors. Italian banks in particular are so exposed to their own sovereign debt that they may have decided to gamble away, figuring they are dead anyway. Might as well take the ECB with them. But we need to constantly ask ourselves what is the risk to the ECB itself, and by extension Germany, France, Italy and Spain, who are the principal sponsors of the ECB. What happens when the banks evaporate in the next debt hiccup and the ECB needs to seize the collateral.
This article at FT Alphaville by Joseph Cotterill provides the gory details.
It appears the LTRO has mostly been about a cozy arrangement with French banks, and to a lesser extent Italian banks. The ECB quietly expanded the list of collateral it would accept by more than a third at the start of the year. Almost all the 10,599 debt instruments it added were from banks – and more than 8,000 of them from French banks. The ECB is going about accepting unlisted bank bonds — i.e., bonds that the banks could have issued purely to themselves solely in order to pledge them as collateral for central bank funding. They carry no prospectus, etc. If the ECB we-take-no-losses-in-defaults model holds true, then other bank bondholders will be further subordinated down the capital structure.
Wonderful, the ECB can secure its lending to these already hyper-leveraged exposed banks, with flaky bonds issued by the same cast of characters. How is that going to work in a pinch? Oh we already are in a pinch. It is obvious that Europe is now “all in” and fully prepared to go down with their bankster cronies. (Chart by Trend Macro, Unlisted in euroland)
For additional analysis on this topic and related trades, subscribe to Russ Winter's Actionable - risk free for 30 days. Click here for more information.