As IFLR reported earlier this week, the European Central Bank's liquidity scheme has become a dumping ground for unsellable assets. The ECB has unveiled major reforms to its system, but insists the scheme has worked well.
Yesterday, the ECB announced that it would make it less advantageous to access central bank funding by imposing a larger haircut on deposited collateral.
"We wanted to ensure that the Eurosystem remains adequately protected against the observed changes in financial markets," said Jean-Claude Trichet, president of the ECB. "These measures do not change the general characteristics of the Eurosystem's collateral framework... we consider that it has served us very well."
From February 1, the ECB will dock 12% off the value of asset-backed securities deposited with the ECB as collateral. Previously, the bank had applied a haircut of 2% to 18%, but most assets were treated very favourably.
Under the revised system, assets valued using models, rather than mark-to-market, and unsecured bank bonds will be subject to an additional 5% haircut, taken before the 12%.
The ECB will also require a ratings agency report on the assets being posted as collateral. The bank has not increased the required rating for collateral from single-A, or increased the number of ratings agencies that must rate the product. But it wants to see reports on deposited securities' structure and collateral pool.
Trichet played down reforms to the scheme ("we are not changing it. We are refining it") and said the reforms were part of a scheduled review conducted every two years. But the industry has expressed concern that the restrictions will make liquidity even harder to access.