ECB’s de Guindos, Schnabel: Can Extend or Modify Collateral Steps

23 April 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank could keep its relaxed collateral rules in place longer than currently planned or modify these, according to the situation, ECB Vice President Luis de Guindos and Executive Board member Isabel Schnabel said Wednesday.

The ECB on Wednesday decided on a series of temporary measures to cushion the impact on collateral eligibility of possible rating downgrades in the aftermath of the pandemic. The decisions complement a first announcement on April 7 of a three-part emergency collateral package to make it easier for banks to finance their lending to the real economy.

In a blog post on the ECB’s website that they said “explains the economic rationale” behind the two sets of measures, de Guindos and Schnabel portrayed the decisions as a logical complement to other liquidity measures by making it easier for the Eurosystem’s counterparties to come up with collateral, thus supporting the financing of the real economy.

Noting the temporary nature of the measures, intended to remain in effect until September of next year, they added that “in assessing the evolving risks to the smooth transmission of our monetary policy to the real economy, the Governing Council will use the full flexibility embedded in our measures to extend or modify these decisions as necessary.”

In acting “promptly and decisively,” the ECB had as one objective averted an “acute” collateral shortage, de Guindos and Schnabel wrote.

A second objective of the collateral easing measures, they said, had been to make risk management more flexible, accomplished by modifying the so-called additional credit claims (ACC) frameworks and thus allowing national central banks the discretion to accept as collateral loans otherwise excluded.

“Third, and most importantly, the measures counter adverse pro-cyclical feedback effects that could emerge due to reduced collateral availability, while containing the build-up of additional risk on our balance sheet,” they said. Asset price drops in the wake of the pandemic “have already put pressure on the availability of collateral,” they said. Rating downgrades could exacerbate this, make it harder for banks to access central bank liquidity and lead to reduced lending, potentially triggering a feedback loop.

In its initial collateral easing measures on April 7, the ECB had granted a waiver of the minimum quality standards for Greek sovereign debt, so that the latter can be accepted as collateral by the Eurosystem. De Guindos and Schnabel asserted that this temporary waiver “helps shield the recent progress achieved by the Hellenic Republic and the Greek banking system from the economic fallout of the pandemic and prevents fragmentation in funding access across the euro area.”