Thursday, September 04, 2008

ECB Tightens Rules On Liquidity Facilities

You know that something was wrong when it was lucrative to dump Australian credit card paper to the ECB..... In general it will be very difficult to shut down the Pandora´s Box of the very broad collateral that all central banks have agreed to accept or at least put up a haircut that is reflecting the underlying risk adequately .... It will be very interesting to see how the central banks balance sheets will look like within a few years...... But compared to what
Chinas central bank is facing Main Bank of China Is in Need of Capital ( stunning !! ) the ECB is looking less foolish on a relative basis ......... :-) One of the reasons why i like gold....

Wenn es sich lohnt australische Kreditkartenforderungen zu verpacken und bei der EZB abzuladen wird es aber auch höchste Zeit das die Bedingungen angepasst werden..... Generell ist festzustellen das es den Zentralbanken rund um den Globus sehr schwer fallen dürfte das breite Spektrum das als Sicherheit akzeptiert wird auf ein gesundes Maß zurückzufahren bzw wirklich dem Risiko angemessenen Abschlägen zu versehen. Möchte mir lieber nicht vorstellen wie die Bilanzen der Zentralbanken in ein paar Jahren aussehen werden. Denke es ist nicht verwegen zu behaupten das sich dort ne Menge recht "zweifelhafter" Papiere wiederfinden werden...... Verglichen mit aktuellen Problemen der chinesischen Zentralbank sieht das ganze aber schon wieder halb so wild aus Main Bank of China Is in Need of Capital ..... Wirklich unfassbar! :-) Einer der der etlichen Gründe warum ich eine Goldposition im Depot für mehr als angemessen halte..... Aus der FT Deutschland EZB wird bei Sicherheiten vorsichtiger

Bank Bond Risk Soars to Five-Month High as ECB Tightens Lending
Sept. 4 (Bloomberg) -- The cost of protecting European bank bonds from default rose to the highest in five months after the European Central Bank tightened its criteria for lending.

The ECB will charge banks more to borrow by reducing the amount it lends to as little as 16.4 percent below the face value of collateral pledged, President Jean-Claude Trichet said at a press conference in Frankfurt today. Credit-default swaps on the Markit iTraxx Financial index of subordinated debt for 25 European banks and insurers jumped 12 basis points to 177, the highest since April 1, according to JPMorgan Chase & Co. prices at 6 p.m. in London.....

The ECB is changing its requirements to head off abuse by financial institutions. The ECB accepts a broader range of collateral for loans than the Federal Reserve or the Bank of England, including bonds with credit ratings five levels below AAA and asset-backed securities, prompting some firms to create bonds specifically to use as collateral to borrow from the ECB......

`Gaming the System'
ECB council member Yves Mersch said in an interview last month that the central bank is concerned that some financial institutions are ``gaming the system.''

The ECB lent 467 billion euros ($670 billion) last week to banks with operations in the 15-country euro area. Lenders in Spain have almost tripled borrowings from the Frankfurt-based ECB in the past year, the fastest increase in Europe, according to data from the countries' central banks. Spanish banks have stored up 89 billion euros of asset-backed securities to pledge as collateral, according to UniCredit SpA.

Bonds backed by mortgages and other assets accounted for 18 percent of the ECB's loan collateral at the end of 2007, up from 4 percent in 2004, Fitch Ratings data show.

Sydney-based Macquarie Group Ltd. sold bonds backed by Australian consumer loans in June through a special-purpose company in Ireland, enabling investors to use the notes as collateral to borrow from the ECB.

Haircut
The new rules on collateral, which will take effect from February, will apply a discount of 12 percent on asset-backed bonds, up from as little as 2 percent, Trichet said. Bonds that don't trade or are difficult to value will have an additional so-called haircut of 5 percent, Trichet said. The ECB will lend 5 percent less than the face value of unsecured bank bonds.....

WSJ
ECB President Jean-Claude Trichet said the changes would only affect a “small fraction” of the more than one trillion euros of assets banks submit as collateral each year. Asset-backed securities amounted to 16% of the collateral in 2007.

via the FT ( HT Naked Capitalsim )

The changes, which take effect from February 1, include increases in the average “haircuts” applied to asset-backed securities. A haircut is the amount deducted from the market value of a product when judging its value as collateral. In future, a blanket 12 per cent haircut will apply, replacing a previous sliding scale of between 2 per cent and 18 per cent. There will be penalties for asset-backed securities valued using models and for unsecured bank bonds.

Für alle illiquiden ABS nimmt die EZB künftig unabhängig von Laufzeit oder Verzinsung zunächst einen Bewertungsabschlag von 5 Prozent auf den Nominalwert vor und zieht dann zusätzlich einen Risikoabschlag (Haircut) von pauschal zwölf Prozent ab. Damit ergibt sich ein durchschnittlicher Abschlag von 16,4 Prozent. Bisher gelten für solche Papiere nur Haircuts von 2 bis 18 Prozent


The next table is taken from page 39 GUIDELINE OF THE EUROPEAN CENTRAL BANK and is shwoing the structure before yesterdays announcement

Die nachfolge Tabelle ist von Seite 39 GUIDELINE OF THE EUROPEAN CENTRAL BANK und zeigt die Aufteilung vor der gestrigen Ankündigung.
Here is the ECB release from yesterday introducing a new category

Hier nun die EZB Veröffentlichung von gestern die zudem eine neue Kategorie einführt

4 September 2008 - Biennial review of the risk control measures in Eurosystem credit operations
With regard to the risk control measures applied to marketable assets, a new liquidity category for marketable assets will be introduced (see Table 6 of the “General Documentation”). This new category IV will be composed of credit institution debt instruments (other than Jumbo and traditional covered bank bonds) that were previously part of category III. Old category IV will be renamed category V. The valuation haircuts applied to eligible marketable assets in the different liquidity categories will be as follows

* Assets in this liquidity category that are given a theoretical value (in accordance with Section 6.5 of the “General Documentation”) will be subject to an additional valuation markdown of 5%

As can be seen from the table, assets in new liquidity category V (former liquidity category IV) will be subject to a haircut of 12% regardless of their residual maturity and coupon structure. This corresponds to the level of haircuts that was previously assigned to assets in this liquidity category with a fixed coupon and a residual maturity of over ten years. Furthermore, assets in this liquidity category that are given a theoretical value (in accordance with Section 6.5 of the “General Documentation”) will be subject to an additional valuation haircut. This haircut will be applied directly to the theoretical value of the asset in the form of a valuation markdown of 5%, which corresponds to an additional haircut of 4.4%


Levels of valuation haircuts applied to eligible marketable assets in relation to fixed coupon and zero coupon instruments (percentages)
Liquidity categories
Category I Category II Category III Category IV Category V
Residual
maturity
(years)
Fixed coupon Zero coupon Fixed coupon Zero coupon Fixed coupon Zero coupon Fixed coupon Zero coupon Fixed or zero coupon
0-1 0.50.5111.51.56.56.512*
1-3 1.51.52.52.53388
3-5 2.533.544.559.510
5-7 33.54.555.5610.511
7-10 44.55.56.56.5811.513
>10 5.58.57.5129151420

The ECB will no longer accept securities in which the issuer bank or a related party is providing support to the transaction through currency swaps or emergency backstop loans, Trichet said.

It will also require bonds to be publicly rated and for the rankings to be explained in published reports. The securities should have new reports from rating firms every three months.

``The losers are the banks retaining bonds to raise cheap collateral, now the cost will be higher,'' said Luca Jellinek, a London-based strategist at Royal Bank of Scotland Group Plc. ``The winners are the rest of the euro system whose collateral has been edged out by retained ABS.''

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5 Comments:

Anonymous Barley said...

Bugs me that they are to use "face value" not market value. But it is a step in the right direction. I dont see this happening in the US because the banks need to borrow back and sell thier junk to maintain their balance sheets save they show their true colours about being insolvent.

Slightly O/T

Interesting contrast: UK's program to support housing is rolling out but that any homeower that is underwater is barred from participating or benefiting from the program AND We have Gross in the US asking that the Government bail everybody out by backing bonds and therefore propping up folks who made stupid decisions to buy the crap paper.
Begs the question: Is the US really a free enterprize economy? And, has the UK abandoned the labour movement?

More off topic: Question to you - wtf happened in the currency markets last night? Was it the Carry Trade unloading to balance positions b/c of the USD rise and US market fall? Given the moves I saw, I thought someone in the EU was despartly looking for a bundle of US cash - at any price. Was someone blowing up?

8:00 AM  
Blogger jmf said...

Moin Barley,

i agree that if the Fed moves they will further relax their standarts...

The entire US "free market" talk is the biggest joke ever.... One of the reasons i have stopped listening to anything on bubblevision.

Numerous baliouts are coming. Wouldn´t suprise me if Hank & Ben are working overtime this weekend to manage the Phony & Fraudie problem....

Let´s hope they will find enough dumb foreigners to finance this..... I have some doubts.....

The currency market today war really chaotic. In the end it is really a race to the bottom.... I have added gold during the lates pullback.

Thank god my only currency position is long the NOK against the €.....

You can almost feel all the margin calls and liquidations going on during the past few days....

8:28 AM  
Blogger jmf said...

Moin again,

here is a good take from Barry on Gross/Pimco

What Up With Pimco?

10:57 AM  
Blogger Funny Circus Bears said...

Here is the best rant I've yet seen:

http://www.bastardoldholborn.blogspot.com/

2:46 PM  
Anonymous Anonymous said...

Excelent post. Congratulations from Barcelona (Spain).

www.investorsconundrum.com

11:41 AM  

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