PARIS (MNI) – The European Central Bank’s decision to reactivate
some of the non-conventional liquidity operations it had already phased
out shows a commitment to restore market confidence in the Eurozone
whenever necessary, Fitch Ratings said in a report published Tuesday.

The report also expresses concern that some bank in the Eurozone
may be over-reliant on ECB operations for structural funding needs or
else are using them to boost profitability.

The following is the verbatim text of a press release on the report
put out by Fitch:

Fitch Ratings says in a special report today that the European
Central Bank’s (ECB) weekend announcement that it will extend its
non-standard liquidity measures is in line with Fitch’s expectation that
the ECB will continue to support and work to restore market confidence
as and when required.

However, Fitch notes that while the ECB’s non-standard measures
provide a temporary boost to banks’ liquidity, they are not intended to
be permanent. The agency thus has some concerns that while banks have
generally taken advantage of the measures to implement more rigorous
liquidity management procedures, a number of banks were either unwilling
or unable to do so.

The additional liquidity provided by the ECB through the global
financial crisis since August 2007 was further boosted in May 2010, in
the wake of renewed market volatility, particularly with respect to
Greece’s public finances and the potential knock-on impact with respect
to other southern European countries.

The newly announced non-standard liquidity measures include the
re-activation of USD liquidity swap facilities, additional fixed rate
tender procedures for three-month longer-term refinancing operations
(LTROs), a new six-month LTRO and a new “Securities Markets Programme”
intended to restore liquidity in the debt markets. These measures follow
the suspension, on 3 May 2010, of the application of minimum credit
ratings in the collateral eligibility requirement for all securities
issued or guaranteed by the Greek government.

With respect to the geographical distribution of banks using ECB
facilities, Fitch has found that banks in Greece, Ireland and, to a more
limited extent, Spain and the Netherlands, have been more extensive
users of ECB liquidity than in previous years. This could indicate that
banks in these systems are increasing their reliance on these sources
for structural funding needs or as a boost to flagging profitability.
Conversely, banks in Italy and France have reduced their usage compared
with pre-crisis levels. In Germany and Belgium, banks have also reduced
their use of ECB refinancing operations as a proportion of the total,
but they continue to be heavy users overall compared with other
countries. A number of banks in Germany and Belgium that were heavy
users of ECB funding in the past are undergoing restructuring, involving
significant shrinking of their balance sheets and asset sales.

Overall, the availability and usage of the ECB liquidity facilities
by banks throughout the euro zone has been a credit positive in
sustaining banks’ Long- and Short-term IDRs. Had these facilities not
been available, a greater number of banks would have failed or seen
greater downgrades in their IDRs. Nonetheless, banks with particularly
weak franchises are likely to experience further IDR and Individual
Rating downgrade pressure, as such institutions may suffer a drop in
profitability once ECB facilities return to normal. Fitch thus notes
that further rating downgrades may occur.

Last summer the ECB successfully stabilised funding costs in the
covered bond market by underpinning investor confidence. The ECB
achieved this through its covered bond purchase programme which was
launched in July 2009. However, the effectiveness of the programme in
channelling funds to the real economy is harder to ascertain, as banks
have tended to hoard liquidity.

Liquidity pressures also remain in the structured finance markets,
as banks bridged the funding and liquidity gap created by the closure of
the SF markets in 2007 by increased use of SF securities as eligible
collateral for shorter-term repo funding with the ECB. Given the desire
to manage the credit quality of SF collateral delivered to it, the ECB
has gradually introduced tighter eligibility criteria for SF collateral.
Fitch believes that the ECB’s SF collateral is unlikely to grow
significantly as a source of liquidity beyond the collateral already
within the system, as a result of more limited eligibility and the
degree of SF collateral that has already been structured and retained
for this purpose.

The full report, entitled “The Role of the ECB, – Temporary Prop or
Structural Underpinning?” is available from Fitch’s website at
www.fitchratings.com.

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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