The European Central Bank is to start accepting a wider range of collateral in its lending operations and assets of a lower quality, it said on Friday, its second such move in six months to neutralize growing funding pressures on struggling banks.
"The Governing Council has reduced the rating threshold and amended the eligibility requirements for certain asset-backed securities (ABS)," the ECB said in a statement after its mid-month meeting, usually reserved for non-monetary policy issues.
"It has thus broadened the scope of the measures to increase collateral availability which were introduced on 8 December 2011 and which remain applicable."
Asset-backed securities, complex and difficult-to-value financial instruments, were blamed for playing a key role in the financial crisis that followed investment bank Lehman Brothers' collapse five years ago.
The changes, which will be worth over 100 billion euros and come into force in the coming weeks, cover a range of assets.
The ECB said it will start accepting residential and commercial mortgage-backed securities, securities backed by loans to small and medium-sized firms, car loans and leasing and consumer finance ABS, rated as low as BBB-minus.
Banks will be penalized for using ABS as collateral, ranging from a 16 percent valuation 'haircut' for assets rated in the A band, and up to 32 percent for commercial mortgage-backed securities in the triple-B band.
Up until the end of last year — and in contrast to most forms of collateral — the ECB had been gradually tightening the rules governing the use of ABS.
Prior to the changes, the ECB charged a 16 percent flat rate for using ABS while the minimum quality accepted was A-minus.
The move is the latest in a string of changes to ECB lending rules since the start of the crisis and the second loosening of its standards in just over six months to combat intensifying funding pressures on struggling eurozone banks.
It comes as Spain braces for a downgrade from ratings firm DBRS by the end of August, which is expected to pile extra misery on the country and its banks.
The small Canadian firm is the only one of the four rating agencies the ECB uses to judge collateral quality that still has Spain in A-rated territory.
If it cuts it below that level — as it has signaled it might — and assuming there is no change in ECB rules, it will trigger an extra 5 percent collateral penalty on Spanish government bonds.
The constant lowering of ECB lending standards is raising concerns about the quality of the central bank's balance sheet.
Former top ECB policymaker Juergen Stark described it as "shocking" back in March, while Germany's powerful Bundesbank refused to sign up to rule changes agreed in December due to its concerns.
In its defense, the ECB says the haircuts it applies and its other risk management measures sufficiently protect it.
But the Bundesbank voiced its objections again on Friday after the latest changes. "The Bundesbank is critical," said a spokesman.
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