The ECB has given the eurozone’s 17 national central banks the power to ban the use of bank bonds underwritten by governments in EU/IMF bailout programs as collateral to get unlimited ultra-cheap loans, it said on Friday.
The move is a thinly-veiled attempt to soothe the concerns of Germany’s Bundesbank that the ECB has made it too easy for banks to access its funding and exposed the national central banks to too much risk.
“National Central Banks (NCBs) are not obliged to accept as collateral for Eurosystem credit operations eligible bank bonds guaranteed by a Member State under an EU-IMF financial assistance program,» the ECB said in a statement following its mid-month meeting.
The ECB has for some time accepted bonds which are issued by bailed-out banks but which also carry government guarantees, a change it made to prevent banks in struggling countries such as Greece, Ireland and Portugal from going under.
At the end of last year and early this year it further loosened the rules on what banks are allowed to swap for funding loans to include a wider range of assets and also gave national central banks a greater say in what they took.
The move helped bump up the amount banks took in the two offerings of ultra-cheap three-year funding which combined saw it pump over a trillion euros into the financial system.
But it has also caused alarm for some of the bank’s traditionalists, particularly those at the Bundesbank with its long history of keeping inflation at bay. They fear some of the assets now accepted may be too low in quality and that the wave of cash being created could send prices surging.
Former top ECB policymaker Juergen Stark recently described the quality of some the collateral now accepted as «shocking», while current Bundesbank head Jens Weidmann wrote a letter to ECB President Mario Draghi last month raising his own concerns and urging him to reverse the recent changes.
Friday’s changes could affect banks retroactively, and in theory even force them to pay back money they have borrowed, although that seems unlikely.
Banks typically keep pools of collateral at their central banks rather than piecing it together each time they borrow funding. However, if a central bank such as the Bundesbank or the Bank of France decided to bar Greek bank bonds, banks that had used them would have to have enough alternative collateral in their pool or otherwise pay back what they had borrowed.
A Bundesbank spokeswoman said it would implement the ban but added that it would have no impact on German banks’ ability to get funding. The Bank of France, whose commercial banks are the most exposed to Greek debt, was not immediately available for comment. [Reuters]