FRANKFURT (MNI) – The European Central Bank on Friday announced a
significant loosening of rules on the collateral required to obtain
liquidity, by lowering rating thresholds for certain asset-backed
securities.

New rules should help “to improve the access of the banking sector
to Eurosystem operations in order to further support the provision of
credit to households and non-financial corporations,” the ECB said in a
statement.

Afer the new rules come into force, the Eurosystem will consider
the following ABSs as eligible: Auto loan, leasing and consumer finance
ABSs and ABSs backed by commercial mortgages (CMBSs) which have a
second-best rating of at least “single A” in the Eurosystem’s harmonised
credit scale, at issuance and at all times subsequently. Those ABSs will
be subject to a valuation haircut of 16%.

Also newly accepted will be residential mortgage-backed securities
(RMBSs), securities backed by loans to small and mediumsized enterprises
(SMEs), auto loan, leasing and consumer finance ABSs and CMBSs which
have a second-best rating of at least “triple B” in the Eurosystem’s
harmonised credit scale, at issuance and at all times subsequently.

RMBSs, securities backed by loans to SMEs, and auto loan, leasing
and consumer finance ABSs would be subject to a valuation haircut of
26%, while CMBSs would be subject to a valuation haircut of 32%, the ECB
said in a statement.

New rules will become applicable on 28 June or shortly thereafter,
onvr possible additional requirements have been specified in a legal
act.

According to various media reports, the changes are only an initial
step that could see broader changes to the ECB collateral framework.
Future steps could include the ECB dropping its reliance on external
rating agencies when determining haircuts on government bonds, according
to some of the reports.

Currently, these ratings determine the amount of liquidity a bank
can get when pledging a bond as collateral. Bonds rated below A have are
subject to larger haircuts, which increase the lower the rating is.

Caught in the negative feedback loop between weak sovereigns and
their banking systems, even solvent banks are running out of eligible
collateral as the debt crisis hits their bonds holdings and deposits.

–Frankfurt newsroom +49 69 72 01 42; e-mail: frankfurt@marketnews.com

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