FRANKFURT (MNI) – The European Central Bank expressed “serious
concerns” that the legislation for the Irish bank rescue could weaken
the ECB’s rights with regard to collateral posted with the Eurosystem
against liquidity.

The central bank said in a position paper released Friday that
proposed legislation must be clarified to ensure the Eurosystem’s rights
and ability to conduct operations.

The warning highlights rising ECB concern over mounting risks it is
taking on its balance sheet in its fight against the Eurozone’s debt
crisis.

In particular, the central bank warned that the draft law for the
Irish credit institutions’ stabilization bill may weaken its rights over
collateral provided under emergency liquidity assistance.

“The ECB has serious concerns” over the impact of the draft law on
“the rights of the Central Bank, the ECB and possibly other central
banks within the ESCB, the scope of collateral rights of central banks
given as security against emergency liquidity assistance, as well as
other issues,” it said.

Banks borrowing money from the Eurosystem usually have to post
eligible collateral as a security for the central bank should some of
the funds not be paid back. The ECB insists that the legislation must
ensure its rights over such collateral.

The law “should not impair the ability of the Central Bank or the
ECB to maintain the Eurosystem’s operations and, in particular, to
enforce their rights including, without limitation, the enforcement of
security over any eligible collateral posted by any relevant
institution…,” the ECB said.

The ECB also insists that “the draft law should make clear that the
Treaty principle of central bank independence prevails over any
incompatible draft law provision.”

The ECB’s policy of unlimited liquidity provisions has made safe
collateral provision even more important than in normal times as it
lends out more money to weaker institutions. According to latest
available data, Irish banks have E136 billion outstanding from the ECB.
Another E45 bln has been lent out by the Irish central bank under the
emergency liquidy assistance the paper refers to.

To boost its financial strength in the face of increased risks
stemming from the liquidity operations, as well as from sovereign bonds
buys and more general market volatility, the central bank on Thursday
announced its first ever general capital increase by E5 bln to E10.76
bln.

–Frankfurt bureau; +49-69-720142, jtreeck@marketnews.com

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