On its way to embracing observable event based reporting, ECB increasing scrutiny of ABS collateral

In a significant step towards embracing requiring observable event based reporting, Reuters reports that the ECB is increasing its scrutiny of ABS collateral by requiring banks to notify it one month in advance of making any changes in the underlying collateral for deals that are pledged to the ECB.

The European Central Bank is to increase its scrutiny of the asset-backed securities banks exchange for ECB loans, by demanding they inform it of even the slightest changes to the make up of the tricky-to-value assets....

Please re-read the highlighted text because once the ECB started down the path of wanting information on the slightest change to the underlying collateral there is no logical stopping point prior to requiring observable event based reporting as a condition of eligibility for an ABS security to be pledged as security for a loan.

Regular readers know that under observable event based reporting, all observable events involving the underlying collateral are reported before the start of the next business day.  An observable event includes, but is not limited to, a payment, a delinquency, a default, a borrower filing for bankruptcy, a modification of the terms on the collateral and a substitution of new collateral for existing collateral.

Observable event based reporting is needed if the ECB or any investor is going to be able to know what they own.

Decisions made at its mid-month meeting this week, details of which were published on Friday, showed the bank was further upping its scrutiny of ABS collateral with immediate effect. 

The changes mean borrowers will have to tell the ECB if they swap any of the assets that make up a securitisation, even if the shuffling does not trigger any change in its overall rating. 

"Counterparties (borrowers from ECB)... are to inform the Eurosystem: (i) one month beforehand of any planned modification to an ABS that it has submitted as collateral," ...
"And (ii) upon submission of an ABS, of any modification made to that ABS in the six months prior to its submission, if the ABS is "own-used". 

The latest figures from the ECB showed that asset-backed securities made up 21 percent of all collateral used by banks taking loans from it in 2010.