ECB Temporarily Eases Collateral Rules, Issues Greece Waiver

10 April, 2020

By David Barwick - FRANKFURT (EconoStream) – The European Central Bank on Tuesday decided on a series of measures to make it easier for banks to finance their lending to the real economy, in the process issuing to Greece a waiver making its sovereign debt acceptable collateral for the Eurosystem, according to a statement published on the ECB’s website. The first pillar of the three-part emergency collateral package meant as a response to the fallout from the pandemic consists of measures expanding the use of credit claims as collateral. The ECB said it would accomplish this via several tweaks to the so-called additional credit claims (ACC) frameworks. The ACC frameworks allow national central banks to, inter alia, accept loans with lower credit quality; accept loans to types of debtors excluded by the ECB’s general framework (which specifies the eligibility criteria for non-marketable assets such as credit claims); and accept foreign-currency loans. The second pillar of the ECB’s emergency collateral package includes a reduction to zero of the size of domestic credit claims eligible for use as collateral, so that loans made to small companies also qualify; an increase to 10% of the maximum share of unsecured debt that any bank can hold in a given institution’s collateral pool; and a waiver of the minimum quality standards for Greek sovereign debt, so that the latter can be accepted as collateral by the Eurosystem. Thirdly, the ECB relaxed its risk tolerance for credit operations by reducing by a straight 20% collateral valuation haircuts. The ECB said that this “aims to contribute to the collateral easing measures while maintaining a consistent degree of protection across collateral asset types, albeit at a temporarily lower level.” The  various measures are for the duration of the crisis triggered by the pandemic and tied to the life of the Pandemic Emergency Purchase Programme (PEPP), the ECB said. “They will be re-assessed before the end of 2020, also considering whether there is a need to extend some of these measures to ensure that Eurosystem counterparties’ participation in its liquidity providing operations is not adversely affected,” it added. Above and beyond the temporary haircut reduction, the ECB further decided to adjust haircut parameters applicable to non-marketable assets, characterizing this additional measure as part of its regular risk control framework review and saying it was not linked to the duration of the PEPP. “This leads on average to a further haircut reduction of this type of collateral by around 20%,” the ECB said. At the level of committees, the ECB said it would consider how to address the effect of rating downgrades on counterparties’ collateral availability, were the economic impact of the pandemic to lead to downgrades.