The Governing Council of ECB adopted a package of temporary collateral easing measures to facilitate the availability of eligible collateral for Eurosystem counterparties to participate in liquidity providing operations, such as the targeted longer-term refinancing operations (TLTRO-III). To this end, the Governing Council decided on a set of collateral measures to facilitate an increase in bank funding and to temporarily increase its risk tolerance level in credit operations. The measures collectively support the provision of bank lending, especially by easing the conditions at which credit claims are accepted as collateral.
In this regard, ECB has published a guideline that amends Guideline ECB/2014/31 on additional temporary measures relating to Eurosystem refinancing operations and eligibility of collateral. ECB has also published a Decision that amends EU guidelines 2015/510 and 2016/65. The emergency collateral package contains three main features. First, the Governing Council decided on a set of collateral measures to facilitate an increase in bank funding against loans to corporates and households. In this respect, the Governing Council decided to temporarily extend the additional credit claims frameworks further by:
- Accommodating the requirements on guarantees to include government and public-sector guaranteed loans to corporates, small, and medium-sized enterprises (SMEs), and self-employed individuals and households in the additional credit claims frameworks, with the aim to provide liquidity against loans benefiting from the new guarantee schemes adopted in euro area member states as a response to the COVID-19 pandemic.
- Enlarging the scope of acceptable credit assessment systems used in the additional credit claims frameworks, for example, by easing the acceptance of banks’ own credit assessments from internal rating-based systems that are approved by supervisors.
- Reducing the additional credit claims loan-level reporting requirements to allow counterparties to benefit from the additional credit claims frameworks, even before the necessary reporting infrastructure is put in place.
Second, the Governing Council decided to temporarily increase its risk tolerance level in credit operations through a general reduction of collateral valuation haircuts by a fixed factor of 20%. Third, the Governing Council adopted the following temporary measures:
- A lowering of the level of the non-uniform minimum size threshold for domestic credit claims to EUR 0 from EUR 25,000 previously to facilitate the mobilization as collateral of loans from small corporate entities.
- An increase, from 2.5% to 10%, in the maximum share of unsecured debt instruments issued by any single other banking group in a credit institution’s collateral pool. This will enable counterparties to benefit from a larger share of such assets.
- A waiver of the minimum credit quality requirement for marketable debt instruments issued by the Hellenic Republic for acceptance as collateral in Eurosystem credit operations.
In addition, as part of the regular review of its risk control framework, the Governing Council decided to adjust the haircuts applied to non-marketable assets, both in the general collateral framework and for additional credit claims, by fine-tuning some of the haircut parameters. This adjustment applies in addition to the temporary haircut reduction and thus further supports the collateral easing measures while maintaining adequate risk protection. This leads, on average, to a further haircut reduction of this type of collateral by nearly 20%. Furthermore, the Governing Council has mandated the Eurosystem committees to assess measures to temporarily mitigate the effect on counterparties’ collateral availability from rating downgrades arising from the economic impact of COVID-19, while continuing ensuring collateral adequacy.
Keywords: Europe, EU, Banking, Securities, COVID-19, Credit Risk, TLTRO, Regulatory Haircuts, Counterparty Risk, Collateral Framework, Loan-Level Reporting Requirements
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleBOT Announces Measures to Ease Impact of COVID-19 Outbreak
APRA updated the lists of the Direct to APRA (D2A) validation and derivation rules for authorized deposit-taking institutions, insurers, and superannuation entities.
EC adopted a package that includes the digital finance and retail payments strategies and the legislative proposals for regulatory frameworks on crypto-assets and digital operational resilience.
ECB published an opinion (CON/2020/22) on proposals for regulations amending the securitization framework of EU, in response to the COVID-19 pandemic.
FCA is consulting on its approach to the authorization and supervision of international firms operating in UK.
MAS published amendments to Notice 637 on the risk-based capital adequacy requirements for reporting banks incorporated in Singapore.
FCA announced that it will move firms to RegData from Gabriel in the coming months in stages, based on the reporting requirements of firms.
ISDA issued a letter to regulators to flag that it now expects the supplement to the 2006 ISDA Definitions and the Interbank Offered Rate (IBOR) Fallbacks Protocol to be effective around mid- to late-January 2021.
APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.
ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.
BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.