ECB toughens its stance on lending rules

City A.M. Reporter
THE European Central Bank (ECB) has made changes to its legal framework which underscore its power to limit individual banks’ borrowing at lending operations, amid ongoing discussion about how to tackle the dependency of some institutions on its funding.

The changes, published over the weekend, clarify its ability to bar or restrict banks from borrowing from the ECB and impose ad-hoc limits on what assets can be swapped for loans.

“On the grounds of prudence, the Eurosystem may also reject assets, limit the use of assets or apply supplementary haircuts to assets submitted as collateral in Eurosystem credit operations by specific counterparties,” the new legal text said.

The changes came into force yesterday and although there was already a provision to restrict banks’ borrowings, the new rules spell out the ECB’s powers more clearly.

As well as fears about a reliance on ECB funds, the changes come after the central bank was forced to write off €10.3bn (£9bn) of collateral it was left holding after the collapse of Lehman Brothers and Icelandic banks.

The new rules also set clearer limits on hard-to-value asset-backed securities by removing swaps and synthetic securities from the list of eligible cash-flow generating assets.

To make it easier to claw back money if a bank collapses, they also limit ABS originators and where the underlying assets come from to the European Economic Area. There are also new rules for structured covered bonds backed by property loans.

The ECB has already toughened lending rules once this year. From January banks will face higher penalties if they use weaker-rated corporate debt to borrow ECB cash.

The latest changes also allow the ECB to slap extra penalties on banks on a case-by-case basis and could potentially be used to try to force banks to break their dependency on its funding.

Official central bank data show that Southern European and Irish banks are the most dependent on ECB funding, with Greek, Irish, Portuguese and Spanish banks taking more than half of ECB loans.