Unlisted in euroland | FT Alphaville

Unlisted in euroland

Remember this?

First, the Eurosystem has abolished the eligibility requirement (Sections and that debt instruments issued by credit institutions, other than covered bank bonds, are only eligible if they are admitted to trading on a regulated market. At the same time, the Eurosystem risk control measures for marketable assets (Section 6.4.2) have been amended. Specifically, the Eurosystem has reduced the limit for the use of unsecured debt instruments issued by a credit institution or by any other entity with which the credit institution has close links. Such assets may only be used as collateral to the extent that the value assigned does not exceed 5% of the total value of collateral submitted (instead of 10%, as previously stipulated).

…The updated version of the “General Documentation” will apply from 1 January 2012 and can be found on the ECB’s website.

It’s OK if you don’t. Few have.

It’s part of a few “technical” changes to the European Central Bank’s rules for accepting European bank assets as collateral. They were quietly slipped out late in September. December’s moves to massively expand the list of collateral (to avert a collapse of secured interbank lending — effectively by substituting the ECB) grabbed all the limelight. Even so, we said the ECB’s decision in September to accept unlisted bank bonds — i.e., bonds that the banks could have issued purely to themselves solely in order to pledge them as collateral for central bank funding — was “potentially very significant”.

Silly old us. It was much more important than that.

The FT’s James Mackintosh in Tuesday’s Short View column:

The ECB quietly increased the list of collateral it would accept by more than a third at the start of the year. Almost all the 10,599 debt instruments it added were from banks – and more than 8,000 of them from French banks. Furthermore, French banks also dominate the list of newly eligible instruments created since the rules were announced.

This smacks of desperation at the French banks. Already some Irish and Greek banks have run out of eligible collateral and had to turn to their national central banks. If French banks hit the same problem, it would be a disaster.

Yet, the piling up of collateral ought to ease worries about France’s banks being squeezed by a liquidity crunch, as Lorcan Roche Kelly at Trend Macro points out. Far from running out of collateral, the French banks now appear to have an almost unlimited line of credit at the ECB.

And here’s a pair of charts – courtesy of Trend Macro – which visualise the above (click to enlarge):

As Lorcan wrote in a note last week, there is also more to come, as banks are preparing collateral made eligible by the December rule changes. Lorcan added that collateral freshly-minted at the beginning of this year hasn’t been pledged yet, probably: demand at 2012’s first weekly Marginal Refinancing Operation by the ECB actually fell, from €145bn to €130bn. Therefore this collateral is likely being stored up for the ECB’s second, and last, three-year Long-Term Refinancing Operation in February.

But as James also found out — many of the bonds are not listed on public markets. They carry no prospectus, etc. Banks have therefore applied the September rule change to the hilt. And why not? It’s very unlikely they’ll be able to pledge these kinds of assets in private markets, and in fact, banks will wish to conserve quality — listed — collateral for private use. As Lorcan has described it, applying to have this kind of collateral accepted at the ECB is like “kitchen-sinking” assets.

Nor is it only French banks. You might notice in the second chart a jump in Italian bank collateral additions (though the number of instruments is much smaller than for ‘core’ banks).

Yesterday a friend of FT Alphaville pointed out to us that UniCredit — currently catching headlines for its €7.5bn equity raising this week — also quietly issued €7.5bn in three debt securities.

All of it… not listed. And issued… on January 2, 2012.

Related links:
Why the ECB is a good bank with rubbish assets – FT Alphaville (2009)
Collateral damage at the ECB – FT Alphaville (2009)
A central bank is only as good as its target – FT Alphaville
Let there be credit claim collateral – FT Alphaville