Collateral for ECB funds soars to €215bn

Collateral for ECB funds soars to €215bn

By Ralph Atkins in Frankfurt

Published: February 15 2008 02:26 | Last updated: February 15 2008 02:26

Eurozone banks increased sharply their use of mortgage-backed debt and similar structured bonds last year in order to raise money from the European Central Bank, helping to avoid liquidity problems in financial markets.

The volume of asset-backed securities pledged as collateral in ECB market operations to provide funding to banks reached €215bn ($315bn) by the end of last September, the bank said in data released on Thursday. This took the proportion of such debt being used up to 17 per cent of all collateral pledged, up from 12 per cent in 2006.

However, European banks are known to have rapidly increased their use of mortgage-backed debt to raise funding from the ECB in the final three months of the year, especially those in Spain and Holland.

The increasing use of such debt has raised eyebrows in financial markets in recent weeks but Jean-Claude Trichet, ECB president, has denied that the bank is helping to bail out markets, arguing that – unlike other central banks – it has not changed its rules since the financial market turmoil erupted last year.

In its monthly bulletin on Thursday, the ECB went further, arguing that the “wide acceptance of high-quality collateral” in eurozone central banks’ credit operations “has probably helped indirectly to mitigate liquidity problems in a number of market segments”.

Marco Annunziata, chief economist at Unicredit, argued that the ECB’s broad-based collateral system had proved “brilliant” during the recent crisis, but risked creating the wrong incentives for banks, encouraging them to build up stocks of asset-backed securities.

He said: “Looking forward, the ECB should ask itself: is this something we want to maintain?”

The ECB acknowledged that it had had misgivings about the wide variety of collateral it accepted – the product of different systems inherited from national central banks prior to the launch of the euro in 1999.

In 2006, it had tightened its rules because it “did not feel comfortable” with features of some instruments it was accepting, the bulletin article revealed. The new rules tightened the criteria on which kinds of securities would be accepted and from which countries.

But the ECB also said that, compared with other central banks, it accepted a high volume of what it called “private label” asset-backed securities.

By contrast, the US Federal Reserve in its temporary open market operations did not accept mortgage-backed securities without a guarantee from a government agency.