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
Previous Article
BCBS Publishes Basel III Monitoring Updates in June 2020Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.