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ECB loosens rules in response to crisis

ECB loosens rules in response to crisis
The European Central Bank will accept a wider range of collateral in its lending operations and also assets of a lower quality amid mounting worries about Spain.

"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. “The changes would take effect after June 28”.

The ECB said it would now accept residential mortgage-backed securities as collateral for loans. The move will particularly support Spanish banks, suffering from huge volumes of mortgage loans dating back to a property bubble that burst in 2008. Amid concerns about the state of the lenders prompted Madrid to seek up to €100 billion ($126 billion) to shore them up.

Similarly, auto loan, leasing and consumer finance ABSs would also be included in the pool of eligible collateral.

The ECB last widened the range of assets it accepts as collateral in December, in effect granting weaker commercial banks greater access to long-term loans at ultra low interest rates of 1.0 percent at present.

If eurozone banks do not have eligible collateral for ECB loans and cannot raise funds on interbank markets, they must apply for more costly loans from their national central banks under an Emergency Liquidity Assistance scheme.

Up until the end of 2011 the ECB had been gradually tightening the rules governing the use of ABS since the collapse of Lehman Brothers.