Bank borrowing: Divergence danger in a collateral change

Financial Times

However generous the ECB may be in providing liquidity, eurozone banks must still provide collateral when borrowing funds. Bankers who met Mario Draghi at a crucial November 16 gathering in Frankfurt expressed concern at the shortage of eligible assets – a potential threat to the ECB’s plan to offer unlimited three-year loans. While the pool of assets that eurozone banks could use as collateral is estimated at about €14tn, these are not necessarily held by the institutions that need liquidity most. So, alongside his loan plan, the new ECB president set about changing the collateral rules to give more responsibility to national central banks in the 17 eurozone member states.

The ECB already accepts “asset-backed securities” – bonds backed by loans. In future, countries can make their own temporary arrangements for accepting additional “credit claims” – bank loans, for instance – as collateral. The result could be different standards being applied in different countries.

The catch under Mr Draghi’s scheme is that the national central banks will have to bear the risks themselves. So if a bank that has borrowed from the ECB runs into trouble and losses are incurred, there will be no sharing of the burden with other eurozone countries – as is currently the case.

Along some corridors in Frankfurt there are mutterings about the “Balkanisation” of eurozone monetary policy. Some fear this could let national authorities give local banks unfair advantages over foreign rivals, thus undermining the ECB’s aim of fostering economic integration.

But a main reason for Mr Draghi’s move was expediency. An agreement on a common approach would have been hard to reach in time for the second offer of three-year ECB loans, scheduled for the end of this month. He also avoided complaints from northern European countries that they were being exposed to further risks from crisis-hit southern Europe.

What is more, Mr Draghi could argue that the soaring interest rates faced by crisis-hit members have already Balkanised monetary policy. The ECB hopes his action on collateral will help to narrow those divergences.

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