More Central Bank Gimmicks Exposed As European Collateral Shortage Deteriorates

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.