European Central Bank

ECB mulls tougher bank loan rules

Central bank weighs whether to demand more information from lenders about collateral

PUBLISHED : Friday, 18 January, 2013, 12:00am
UPDATED : Friday, 18 January, 2013, 5:27am

European Central Bank officials were considering new rules that would require banks to give more information about loans used as collateral for borrowing from the institution, a person with knowledge of the situation said.

The ECB wanted to stop lenders taking advantage of the lower burden of information it demanded on loans compared with asset-backed securities, the person said. Officials were still working on the proposals for improving their ability to value the so-called non-marketable assets, the person said.

Loans, credit claims and deposits used as collateral for borrowing from the ECB soared 60 per cent to an average of €668.4 billion (HK$6.89 trillion) in the third quarter of last year, the central bank said, accounting for 27 per cent of the €2.52 trillion of collateral posted. That's more than any other guarantee type and compares with €371.7 billion of asset-backed debt.

"It makes sense to demand that loans face the same, or even higher, disclosure levels as asset-backed securities," DZ Bank debt trader Dalibor Jarnevic said. "By accepting loans, the ECB helped banks with serious liquidity needs to fund themselves."

The Eurosystem was continuously working on improving its collateral framework, with one aim being higher transparency standards for various assets, an ECB official said.

The ECB broadened the types of credit that national banks in seven countries of the euro region can accept as collateral last February in an attempt to reduce stress during the height of the debt crisis.

Increased disclosure demands were being considered because the ECB sought to avoid arbitrage with the collateral rules, the person familiar with the plans said. By pledging unpackaged pools of loans, they can sidestep the higher levels of information required for asset-backed securities, the person said.

Banks create asset-backed securities by bundling loans into bonds that are sold to investors or pledged as collateral for central bank funding.

Separately, the ECB said last week that it was also tightening controls after the national banks of France and Spain applied smaller-than-usual discounts on collateral posted by lenders.

"We take these incidents very, very seriously," ECB president Mario Draghi said. The central bank was creating a data-quality compliance network to monitor national banks' controls, he said.

Elsewhere in credit markets, Goldman Sachs Group issued US$6 billion of bonds in its biggest offering. Zoetis, the animal medicine provider that Pfizer is planning to spin off in an initial public offering, sold US$3.65 billion of debt in its debut issue. Bank of America was said to have raised an US$827.5 million collateralised loan obligation to be managed by Symphony Asset Management.

The US two-year interest-rate swap spread, a measure of debt-market stress, decreased 0.08 basis point to 12.92 basis points. The gauge narrows when investors favour assets such as corporate bonds and widens when they seek the perceived safety of government securities.