Worry for banks over ECB move

The ECB’s decision to suspend the minimum credit rating threshold for collateral eligibility in return for cheap funds could be damaging over the longer term if Irish banks sit on toxic assets rather than recognise losses.

The move by the ECB is a further attempt to ease the funding requirements for struggling sovereigns and banks across the regions. Moreover, the ECB announced that it would accept foreign denominated assets based in the eurozone as collateral.

“The Governing Council of the ECB has also decided that marketable debt instruments denominated in currencies other than the euro, namely the US dollar, the pound sterling and the Japanese yen, and issued and held in the euro area, are eligible to be used as collateral in Eurosystem credit operations until further notice. This measure reintroduces a similar decision that was applicable between Oct 2008 and Dec 2010, with appropriate valuation markdowns,” the ECB said.

Head of Fixed Income at NCB Stockbrokers, Cathal O’Leary, said this measure will be good for BoI in particular because it would be able to post its UK mortgage book as collateral.

“This will ease the funding costs for BoI, which will be good for the wider economy.”

But concerns have also been raised that because banks can now use impaired assets as collateral, it removes the incentive to recognise losses on these assets in the near term. One of the major drawbacks for potential investors in Irish Banks is the uncertainty over the amount of losses sitting on the balance sheets of the banks.

The longer it takes for Irish banks to work through losses, the longer it will take the sector to return to full health.

Managing partner at the consultancy firm CreditRisk, Nick Bullman, said, “In the short term there are some positives for the banks and the sovereigns. But in the longer term it just adds to solvency problems.”

Mr Bullman said the ECB removed the collateral requirements on the belief it will improve liquidity.

“But the ECB balance sheet has gone from being leveraged up by eight times, to being leveraged up by 44 times. Now it is accepting any assets which means that not only is it over-leveraged but it now has huge credit quality issues,” he said.