ECB unveils tougher collateral rules for bank loans

9th October 2010, Comments 0 comments

The European Central Bank unveiled new provisions Saturday regarding key refinancing operations that should tighten some conditions for banks seeking to borrow central bank funds.

The changes follow other reforms already proposed for the global financial system that could determine how much credit is available to drive an uncertain economic recovery.

Notable in the revised framework were "clearer and more stringent provisions on the cash flow-generating assets backing ABSs, identifying swaps and synthetic securities as non-eligible cash flow-generating assets," an ECB statement said.

That means more restrictions on the some kinds of collateral that the commercial banks can offer in exchange for ECB loans, in particular asset-backed securities (ABS), which were linked to the recent financial crisis.

The ECB also decided to give member central banks more leeway to decide whether to accept collateral "on the grounds of prudence or a default."

That means central banks can more easily refuse to accept as collateral any debt owed by institutions that could possibly face insolvency and so be unable to pay ultimately.

As the ECB tightens guidelines on what it will accept in exchange for loans, banks also have to increase their capital reserves to protect against risky lending under the terms of proposed "Basel III" regulations.

Higher minimum capital requirements and higher quality capital are meant to make commercial banks better able to withstand a wave of loan defaults.

The banks in turn warn that if they have to set aside more capital, then they will inevitably have to reduce the amount of money lent to businesses and households to drive economic growth.

© 2010 AFP

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