ECB is divided on taking low quality assets
NOT ALL European Central Bank (ECB) governing council members agreed to fund banks in exchange for lower quality collateral, Bank boss Mario Draghi revealed yesterday.
Europe’s banks flocked to take liquidity from the ECB in December, taking three-year loans after offering assets as security.
At its next long-term refinancing operation (LTRO) at the end of this month, banks will be allowed to offer lower-quality securities as well, although the ECB will take a larger haircut to account for the greater risk it is taking on.
It will be left to the national central banks to decide exactly what will be accepted as collateral in countries like Italy, Spain and Portugal, although the ECB will be able to overrule them if too much risk is being taken.
Draghi yesterday credited December’s LTRO, which saw banks tap the ECB for €489bn (£410.7bn), with lessening the new credit crunch.
Banks invested some of that cash in Italian and Spanish government bonds, taking their yields out of the “danger zone” and reducing the pressure on those embattled governments.
However, the ECB boss maintained that the aim is to boost lending to companies and households, particularly through local and regional banks.
Around €230bn in bank bonds will mature in the coming months, and Draghi hopes the LTROs have helped to lessen the funding squeeze this drain on resources will impose.
Draghi also insisted the ECB will not take any losses on its holdings of Greek government bonds, arguing this would amount to illegal monetisation of debt.
The ECB held interest rates at one per cent, delaying any further loosening on the basis that survey data suggests the economy may have stabilised, albeit at a low level.