On Wednesday the European Central Bank whipped out its scissors to trim a little more off the top of eurozone banks’ repo collateral, as well as restyle certain market segments.
The ECB released its long-trailed revisions to the discounts financials have to take on the assets they provide the central bank in return for its liquidity. In particular, the ECB is introducing a graduated haircut scheme for assets — to take into account varying degrees of riskiness — and creating five eligible categories of ‘liquidity’ each with their own trimming needs depending on maturity and credit rating.
The new haircuts come into force from the start of next year, and look like this:
Coming back to that restyling point — it’s no secret the ECB has been rather ticked-off at the stagnate and often phantasmic nature of the current ABS market, and some parts of the bank and covered bond market. Upping the haircuts on things like ABS, therefore, is a quick why to umm, encourage activity.
In short then, the new graduated scale replaces the previous flat 5 per cent haircut on assets rated BBB+ to BBB-. It applies much tougher haircuts for less liquid assets like ABS (Category V), non-jumbo covered bonds (Category III) and theoretically-valued bonds (extended from ABS to include bank bonds). But it also keeps the haircut on sovereign paper largely the same, which avoids concerns about Greek government bonds but means the sovereign-bank loop probably remains intact.
As for whether that leaves much in the way of collateral remaining — the swift answer seems to be yes, according to analysts. Here’s Goldman Sachs’ ECB-focused economist Natacha Valla:
Collateral is still plenty – no shortages in sight. On the basis of 2009 data, the overall pool of assets that can be pledged as collateral is immense – in 2009, the average amount of eligible collateral increased by about 18% to a total of about EUR 1.3 trillion. Among collateral items actually put forward as collateral, about 30% were uncovered bank bonds, 23% ABSs, and covered bonds / non-marketable instruments were ca. 13% each. Interestingly, the attractiveness of pledging government paper will increase in relative terms.
And Barclays Capital’s Giuseppe Maraffino and Cagdas Aksu:
Indeed, according to the ECB Annual Report (year average data), the share of ABS in the ECB collateral portfolio was 23% in 2009 (down from 28% in 2008, as a consequence of reductions in market values and haircut increases). The fall in ABS saw uncovered bank bonds increase their share to become the largest single class in 2009 at c.28%, thus exceeding the amount of ABS. The amount of non-marketable assets used increased from 4% in 2006, to 14% on average in 2009, although it takes longer to establish eligibility for credit claims than for marketable assets and despite the higher haircuts to which they are subject to. Central government bonds increased as a percentage of total collateral held in the Eurosystem, from 10% to 11% between 2008 and 2009.
But if banks think they have it easy they better watch it.
The ECB was very clear in its press release that it retained a sort-of ad hoc ability to limit or exclude collateral whenever it saw fit — and even at the level of “individual” counterparties.
Banks better get with the ECB’s style standards, or else.
Related links:
ECB unveils tougher rules on bank collateral – FT
Quantifying the ECB overdraft – FT Alphaville
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