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.
Keywords: Europe, EU, Banking, COVID-19, Collateral, Credit Ratings, Procyclicality, Credit Rating Agencies, Credit Risk, TLTRO III, ECB
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.
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