ECB Aims to Ease Impact of Rating Downgrade on Collateral Availability
The Governing Council of ECB adopted temporary measures to mitigate the effect, on collateral availability, of possible rating downgrades resulting from the economic fallout from COVID-19 pandemic. The decision complements the broader collateral easing package that was announced on April 07, 2020. ECB decided to grandfather, until September 2021, the eligibility of marketable assets (and the issuers of such assets) that fulfilled minimum credit quality requirements in the event of a deterioration in credit ratings decided by the credit rating agencies accepted in the Eurosystem as long as the ratings remain above a certain credit quality level. Non-marketable assets are not part of the scope of the temporary grandfathering.
The Governing Council aims to avoid potential procyclical dynamics. This would ensure continued collateral availability, which is crucial for banks to provide funding to firms and households during the current challenging times. The following decisions have been taken:
- Marketable assets and issuers of these assets that met the minimum credit quality requirements for collateral eligibility on April 07, 2020 (BBB- for all assets, except asset-backed securities) will continue to be eligible in case of rating downgrades, as long as their rating remains at or above credit quality step 5 (equivalent to a rating of BB) on the Eurosystem harmonized rating scale. This ensures that assets and issuers that were investment grade at the time the Governing Council adopted the package of collateral easing measures remain eligible even if their rating falls two notches below the current minimum credit quality requirement of the Eurosystem.
- To be grandfathered, the assets need to continue to fulfill all other existing collateral eligibility criteria.
- Future issuance from grandfathered issuers will be eligible provided they fulfill all other collateral eligibility criteria.
- Currently eligible covered bond programs will also be grandfathered, under the same conditions.
- Currently eligible asset-backed securities to which a rating threshold in the general framework of credit quality step 2 applies (equivalent to a rating of A-) will be grandfathered as long as their rating remains at or above credit quality step 4 (equivalent to a rating of BB+).
- Assets that fall below the minimum credit quality requirements will be subject to haircuts based on their actual ratings.
All measures will enter into effect as soon as the relevant legal acts enter into force. The measures will apply until September 2021 when the first early repayment of the third series of targeted longer-term refinancing operations (TLTRO-III) takes place. The same end date will apply to the collateral easing measures announced on April 07, 2020.
Related Links
Keywords: Europe, EU, Banking, COVID-19, Collateral, Credit Ratings, Procyclicality, Credit Rating Agencies, Credit Risk, TLTRO III, ECB
Featured Experts
Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous Article
EBA to Delay First Reporting of FRTB-SA Data to September 2021Related Articles
EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
EP Reaches Agreement on Corporate Sustainability Reporting Directive
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
PRA Consults on Model Risk Management Principles for Banks
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
EC Regulation Amends Standards for Calculating Credit Risk Adjustments
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
BIS Hub Updates Work Program for 2022, Announces New Projects
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
EIOPA Consults on Review of Securitization Framework in Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
BIS Bulletins Discuss DeFi Lending and Aspects of Crypto-Assets
The Bank for International Settlements (BIS) published bulletins on lending in decentralized finance (DeFi) system, on blockchain scalability and fragmentation of crypto, and on extractable value and market manipulation in crypto and decentralized finance.
UK Authorities Issue Regulatory and Reporting Updates for Banks
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
