Lending to tighten as ECB loans top €44.1bn

IRISH bank borrowings from the European Central Bank (ECB) have doubled over the past 12 months to a record €44.1 billion and they face tougher lending conditions in the coming weeks.

The credit crisis has increased the reliance of eurozone banks on the ECB for funds. At the end of July financial institutions operating in Ireland had outstanding borrowings of €44.12bn from the ECB, up from €39.4bn at the end of December 2007. This is a 102% increase on the €21.85bn Irish banks owed the ECB in July of 2007. This compares with Spain whose banks had borrowed a record €49.4bn in July.

It is expected the ECB will announce changes to the rules governing its money-market auctions by tightening the collateral framework that underpins the loans it gives to eurozone banks.

The rules govern what banks can and can’t use as insurance in return for access to ECB funding. As banks have scrambled to get access to capital amid the credit crisis, some have come up with increasingly creative ways to tap into the ECB’s collateral pool.

ECB council member Yves Mersch, at the weekend, said that: “At the margins there can still be cases where you see dangers of gaming the system.

The Governing Council has been discussing the “whole issue” and has agreed on a certain amount” of refinement to the existing rules, he said.

ECB officials have become increasingly concerned that banks are taking advantage of collateral rules that are broader than those used by the Federal Reserve and the Bank of England.

The danger is that banks struggling to sell securities damaged by the credit market turmoil will dump them on the ECB and become overly reliant on central bank funds.

“It’s not a broad-based revolution,” said Mersch, who was attending a meeting of central bankers and financial officials organised by the US Federal Reserve.

Mr Mersch said the ECB is satisfied with its framework.

“But since there are always on the margins evolutions, we have to adjust our framework regularly to market practices.” He added that they would focus on “some instruments”.

Over the last two months the head of the ECB, Jean-Claude Trichet, has said it would look at its collateral rules and revise them if necessary.

While the ECB has been eager to reassure troubled money markets that it will keep providing liquidity no matter what, its concern is that banks may take advantage and leave it holding assets worth far less than it thought.

Additional reporting Bloomberg and Reuters.