The European Central Bank said it will relax some rules on the collateral that banks can offer in exchange for central bank loans.
The ECB has cut the rating thresholds and amended eligibility requirements for some asset-backed securities, the Frankfurt-based central bank said in an e-mailed statement today. Residential mortgage-backed securities and loans to small and medium-sized enterprises rated at least BBB- at Standard & Poor’s will now be accepted with a valuation haircut of 26 percent, it said. The previous minimum rating on such securities was A-.
“They’ve had to acknowledge reality, and they’re obviously having to accept lower-quality paper,” said David Owen, chief European economist at Jefferies Securities International in London. “It’s all part and parcel of the on-going stresses in the system.”
The ECB is acting to ensure banks have enough cash after the 17-member euro area’s debt crisis worsened, pushing up borrowing costs in nations such as Spain and Italy. German Chancellor Angela Merkel held crisis talks with Italian Prime Minister Mario Monti, Spanish Prime Minister Mariano Rajoy and French President Francois Hollande in Rome today ahead of a summit of European leaders in Brussels next week.
The euro rose after the ECB’s statement and traded at $1.2555 at 4:30 p.m. in Frankfurt.
Spanish banks would need as much as 62 billion euros ($78 billion) in capital to withstand a worst-case economic scenario, two consulting firms hired by the government to conduct stress tests on the lenders said yesterday.
Economy Minister Luis de Guindos has said Spain is being punished as markets react to political instability, and urged the ECB to do more to push down borrowing costs.
Auto loan, leasing and consumer finance asset-backed securities and those backed by commercial mortgages with a second-best rating of at least A- at S&P will now be eligible as collateral with a haircut of 16 percent, the ECB said. Commercial mortgage-backed securities with a second-best rating of at least BBB- from S&P would face a haircut of 32 percent.
The “risk control framework with higher haircuts applicable to the newly eligible ABS aims at ensuring risk equalization across asset classes and maintaining the risk profile of the Eurosystem,” the ECB said in the statement.