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ECB MAY LIMIT RISKIER SECURITIES USED AS COLLATERAL

By NBF NEWS
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The European Central Bank may limit the amount of risky assets financial companies can post as collateral for loans as it seeks to cut holdings of securities blamed for worsening the recession, according to analysts at Citigroup Incorporated, Nomura International Plc and Barclays Capital.

The ECB may cap what proportion of collateral can be made up of assets such as mortgage-backed securities, said Citigroup Incorporated's Willem Buiter, who used to help set interest rates at the Bank of England, and Laurent Bilke at Nomura International Plc.

Bloomberg reported on Wednesday that these and other asset-backed debt, whose values dropped after the subprime real-estate crisis, account for the largest share of collateral securing the $993bn in outstanding ECB loans, according to central bank data.

Concerned also that financial institutions are becoming too dependent on cheap central bank cash, euro-region policy makers want to return to auctioning money as the ECB withdraws from the emergency stimulus measures designed to kick-start lending to businesses and support the economy.

'The ECB needs to protect itself after accepting as collateral on generous terms a lot of pretty dubious assets, some of which nobody else was willing to accept on almost any terms,' said Buiter, now chief economist at Citigroup in London.

When credit markets seized up, the ECB started lending banks as much money as they wanted for up to a year at its benchmark lending rate, which policy makers have held at a record-low of one per cent since May 2009.

Banks put up £441bn of asset-backed bonds as collateral for these loans as of end-2008, more than any other type of asset, according to ECB data.

Last year's total will be made public in the central bank's annual report due on April 19.

As the economy emerged from recession, the ECB started scaling back some of the emergency measures. It has stopped the six- and 12-month loans and will end three-month funds from the end of this month.

Now the central bank is looking to go further. The ECB is carrying out its bi-annual collateral policy review and any caps may be announced in September and implemented early next year, Barclays Capital and Nomura said.

Limiting the use of ABS and other riskier securities as collateral 'will make it harder for banks to borrow from the ECB, particularly in conjunction with the overall exit strategy,' said Laurent Fransolet, head of fixed-income strategy at Barclays in London. 'At the same time I can understand why it's doing this, since the ECB is probably more worried about this kind of collateral than Greek government bonds.'

The crisis caused by Greece's struggle to finance the largest budget deficit in the European Union is complicating the ECB's exit from stimulus measures.

President Jean-Claude Trichet said last week that the ECB will keep the minimum credit threshold for bonds used as collateral at BBB- by Standard & Poor's into 2011. The bank will also implement measures from January allowing it to charge financial companies more for taking lower-rated assets as loan security. This minimizes the risk of Greek government bonds becoming ineligible for ECB refinancing operations.