By David Barwick – FRANKFURT (EconoStream) – The European Central Bank 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, according to a statement published on the ECB’s website.

The decisions complement the 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. At that time, the ECB had noted that 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.

Referring to both sets of decisions, the ECB said in announcing the new measures that “together these measures aim to ensure that banks have sufficient assets that they can mobilise as collateral with the Eurosystem to participate in the liquidity-providing operations and to continue providing funding to the euro area economy.”

Should it be necessary, the ECB would take further steps to address the issue of rating downgrades, and in doing so would seek to ensure smooth monetary policy transmission throughout the area, it said.

In particular, the ECB decided that any downgrades applied to marketable assets and their issuers that had met minimum requirements as of April 7 would have no effect on collateral eligibility, provided that the rating did not fall below credit quality step 5 on the Eurosystem harmonised rating scale and that the assets fulfil all other existing criteria. Normally, the Eurosystem applies a minimum collateral eligibility requirement of credit quality step 3, with asset-backed securities and retail mortgage-backed debt instruments subject to slightly stricter criteria.

The ECB said that any new issuance from an issuer grandfathered under the new measure would also constitute eligible collateral as long as all other criteria were fulfilled, and that currently eligible covered bond programmes would also be grandfathered.

Asset-backed securities, which normally need to have at least two credit assessments from recognized rating agencies equivalent to credit quality step 2, would also benefit from grandfathering, but would need a rating at or above credit quality step 4 to maintain eligibility, the ECB said.

The ECB said that assets not meeting the minimum requirements would be subject to haircuts reflecting their rating.

The ECB excluded non-marketable assets such as credit claims from the new measures, which it said would remain in effect until September 2021, the date of the first early repayment of the third series of targeted longer-term refinancing operations (TLTRO-III).

September 2021 would also be the end date applied to the April 7 measures, which it had said at the time were for the duration of the crisis triggered by the pandemic and tied to the life of the Pandemic Emergency Purchase Programme (PEPP).