–Adds Bundesbank critical of new rules, DBRS Rating for Spain

FRANKFURT (MNI) – The European Central Bank on Friday announced a
significant loosening of rules on the collateral required to obtain
liquidity, by lowering rating thresholds for certain asset-backed
securities.

New rules should help “to improve the access of the banking sector
to Eurosystem operations in order to further support the provision of
credit to households and non-financial corporations,” the ECB said in a
statement.

The move is particularly aimed at Spanish banks that not only have
seen their access to liquidity diminish rapidly and that holds
substantial amounts of asset-backed securities.

After the new rules come into force, the Eurosystem will consider
the following ABSs as eligible: Auto loan, leasing and consumer finance
ABSs and ABSs backed by commercial mortgages (CMBSs) which have a
second-best rating of at least “single A” in the Eurosystem’s harmonised
credit scale, at issuance and at all times subsequently. Those ABSs will
be subject to a valuation haircut of 16%.

Also newly accepted will be residential mortgage-backed securities
(RMBSs), securities backed by loans to small and mediumsized enterprises
(SMEs), auto loan, leasing and consumer finance ABSs and CMBSs which
have a second-best rating of at least “triple B” in the Eurosystem’s
harmonised credit scale, at issuance and at all times subsequently.

RMBSs, securities backed by loans to SMEs, and auto loan, leasing
and consumer finance ABSs would be subject to a valuation haircut of
26%, while CMBSs would be subject to a valuation haircut of 32%, the ECB
said in a statement.

The new rules will become applicable on 28 June or shortly
thereafter, once possible additional requirements have been specified in
a legal act.

The ECB’s decision to broaden the collateral pool once again met
with resistance from some of its member central banks. The Bundesbank is
“critical” of the ECB’s new move, a spokesperson at that bank said. The
German central bank had already objected to previous loosening of
collateral requirements, warning that the Eurosystem was taking too many
risks.

According to various media reports, however, the changes may only
be an initial step that could see broader changes to the ECB collateral
framework. Future steps could include the ECB dropping its reliance on
external rating agencies when determining haircuts on government bonds,
according to some of the reports.

Currently, these ratings determine the amount of liquidity a bank
can get when pledging a bond as collateral. Bonds rated below A are
subject to larger haircuts, which increase the lower the rating is.

Current rules could pose a particular risk for Spain, since only
the Canadian rating agency DBRS still has the country within the A band.
DBRS earlier today offered some breathing space by saying it will keep
the rating at A until late August. However, DBRS kept Spain under
review.

Caught in the negative feedback loop between weak sovereigns and
their banking systems, even solvent banks are running out of eligible
collateral as the debt crisis hits their bonds holdings and deposits.

Today’s ECB decision will be particularly beneficial to Spanish
banks, which are top heavy with mortgage-related loans.

–Frankfurt newsroom +49 69 72 01 42; e-mail: frankfurt@marketnews.com

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