In the early evening of Tuesday 7 April, while European finance ministers were attempting to agree new measures to complete the array of European weapons to tackle the pandemic crisis, the European Central Bank (ECB) announced an “unprecedented” easing of its collateral requirements so that banks can be provided with liquidity to make refinancing them easier and to stimulate the provision of loans.
In a press release, the ECB says it will temporarily increase its “risk tolerance” by accepting assets that had previously been excluded as collateral from banks. The bank announced that this includes “loans with lower credit quality, loans to other types of debtors, not accepted in the ECB’s general framework, and foreign-currency loans”.
As an illustration of the degree of easing, the ECB has indicated that it will accept Greek bonds, which have been excluded from the framework since the Greek debt crisis in 2010.
Bank debts arising from loans to SMEs or to households will also be more widely accepted as collateral. In addition, the ECB is widening the scope of collateral by removing the €25,000 limit for loans to small businesses.
Another important measure will involve the ECB reducing by 20% the haircuts it applies to securities provided by banks. The bank explained that “this adjustment 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”.
These measures are temporary for the duration of the Covid-19 pandemic, and are linked to the duration of the PEPP operation involving the massive repurchasing of public and private securities (see EUROPE 12455/7). They will be reassessed before the end of the year to decide whether they should be extended.
The ECB also instructed the Eurosystem committees to assess what measures could be taken to reduce the effects of downgraded ratings on the securities it accepts as collateral for financing granted to banks, which is one of the economic impacts of Covid-19. (Original version in French by Marion Fontana)