Thursday, March 4, 2010

ECB Said to Discuss Lending Covered Bonds to Banks for Fee

Original posted on Bloomberg by By Gabi Thesing and Esteban Duarte:

The European Central Bank may lend covered bonds back to financial institutions for a fee as part of a strategy that would ease banks’ access to funds.

ECB policy makers will discuss the plan at their meeting in Frankfurt tomorrow, said three people familiar with the deliberations. No decision has yet been taken. An ECB spokeswoman declined to comment.

The proposal comes as the ECB tries to withdraw the emergency measures used to fight the financial crisis without spooking investors concerned about Greece’s record budget deficit. While the 39 billion euros ($53 billion) of bonds held by the ECB is equivalent to just 5 percent of the total currently loaned out to banks, the new plan would give them more collateral to lodge with the ECB in return for funds.

“If the ECB were to do this and it would lead to more high-quality collateral being freed up, it could certainly help the banks and the money markets,” said Julian Callow, chief European economist at Barclays Capital in London. “The worst that can happen is that no-one will want to borrow the assets.”

The covered bonds have a minimum rating of AA, seven levels higher than BBB-, the lowest rating the ECB accepts from banks as collateral. The ECB has held covered bonds, securities backed by real-estate or public-sector loans, since its purchase program started in July.

ECB President Jean-Claude Trichet will update investors on the central bank’s exit strategy tomorrow. Officials will decide whether to tighten the terms of its seven-day, one-month, three- month and six-month operations, said Laurent Bilke, a London- based economist at Nomura International Plc. In December, the ECB stopped offering banks unlimited funds for 12 months.


The ECB’s 22-member Governing Council meets as Greece’s fiscal crisis threatens to derail Europe’s economy. While European Union leaders have pledged “determined” action to safeguard financial stability in the euro region, Greek Prime Minister George Papandreou said yesterday his government is still finding “new landmines” in its budget. The euro has dropped 5 percent this year.

Any move by the ECB to lend covered bonds doesn’t mean the central bank will end the purchase program, which is capped at 60 billion euros, said two of the people familiar with the situation. The purchases have pushed down yields in the $3.2 trillion covered-bond market, which underpins much of Europe’s real-estate lending.

The spread on Pfandbriefe, covered bonds typically issued by German lenders, has dropped to 47 basis points from 113 basis points in May, when the purchase plan was announced, Bank of America Merrill Lynch index data show. The yield premium on covered bonds issued outside Germany has declined by 85 basis points to 114 basis points in the same period.

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