ECB's eligible collateral expansion allows banks to bypass frozen funding markets [update]

By approving credit claims as eligible collateral for central bank borrowing, the ECB has addressed three issues.

• Banks can now completely bypass the frozen unsecured debt and interbank loan markets and instead raise funds from the ECB that can be used to repay this unsecured debt at maturity.

• Banks can replace more liquid collateral pledged to the ECB with illiquid credit claims and instead use the liquid collateral to end the collateral crunch in the repo market.

• Banks can now find a way to distribute their credit claims that has not existed since the structured finance market froze.

By addressing these three issues, the ECB has taken off the table the issue of bank runs based on solvency concerns.

The Governing Council of the European Central Bank (ECB) has approved, for the seven national central banks (NCBs) that have put forward relevant proposals, specific national eligibility criteria and risk control measures for the temporary acceptance of additional credit claims as collateral in Eurosystem credit operations. 

Details of these specific national measures will be made available on the websites of the respective NCBs: Central Bank of Ireland, Banco de España, Banque de France, Banca d’Italia, Central Bank of Cyprus, Oesterreichische Nationalbank and Banco de Portugal. 

These developments follow up on the decision of the Governing Council of 8 December 2011 to increase collateral availability by allowing Eurosystem NCBs, as a temporary solution, to accept additional performing credit claims as collateral.