Among the various measures announced by the European Central Bank (ECB) to support the euro area economy, weakened by the spread of covid-19 pandemic, special attention should be paid to the Governing Council's recent announcement that it has adopted a package of temporary (i.e. until September 2021) collateral easing measures, aiming essentially at broadening the scope of eligible assets accepted as collateral in the permanent framework for Eurosystem refinancing operations. In this respect, the ECB especially increased the Eurosystem’s risk tolerance, eased the conditions for the use of credit claims as collateral, adopted a general reduction of collateral valuation haircuts and adopted a waiver to accept Greek sovereign debt instruments as collateral.
In order to reinforce a broader package of collateral easing measures, the ECB announced on 22 April 2020 additional measures regarding assets that would fall below the Eurosystem minimum credit quality requirements, specifying that it will grandfather until September 2021 the eligibility of these marketable assets (excluding non-marketable ones) used as collateral in the Eurosystem credit transactions and apply “appropriate haircuts” for them. Practically speaking, the ECB amended the temporary framework under which the eligibility of assets is assessed to grandfather the eligibility of the following assets:
- marketable assets and their issuers that met the minimum credit quality requirements for collateral eligibility on 7 April 2020 (BBB-), which will remain eligible, as long as their rating does not fall below BB – yet, the assets will need to continue to fulfil all other eligibility criteria;
- future issuances from grandfathered issuers, provided they fulfil all other collateral eligibility criteria;
- currently eligible covered bond programmes; and
- currently eligible asset-backed securities to which a rating threshold applies (A-), as long as their rating does not fall below BB+.
The ECB also specified that the assets that would fall below the minimum credit quality requirements would be subject to haircuts based on their actual ratings.
According to the ECB, these temporary measures are intended to mitigate the effect on the availability of collateral of possible rating downgrades resulting from the economic fallout from the covid-19 crisis by avoiding potential procyclical dynamics, and to ensure that banks have sufficient assets that they can use as collateral to participate in liquidity‑providing operations and to continue providing funding to the euro area economy. As a consequence, these temporary measures should allow the EU credit institutions and other market participants to access to credits granted by central banks more easily, as the scope of “adequate collateral” is broadened.
Further, the measures taken by the ECB should be closely looked at, as the EU central bank specifies that it may decide, if and when necessary, to take additional measures to further mitigate the impact of rating downgrades.