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	0.5	0.5	1	1	1.5	1.5	6.5	6.5	12*
1-3	1.5	1.5	2.5	2.5	3	3	8	8
3-5	2.5	3	3.5	4	4.5	5	9.5	10
5-7	3	3.5	4.5	5	5.5	6	10.5	11
7-10	4	4.5	5.5	6.5	6.5	8	11.5	13
>10	5.5	8.5	7.5	12	9	15	14	20

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.''

Not Only Homeowners Are Having Refinancing Problems.......

It is really no wonder that investors are demanding a much higher risk premium for bank debt.... It will be interesting to see how the central bank balance sheets will look like in 2009/2010....

Wenig verwunderlich das die Investoren zukünftig eine ansprechende Risikoverzinsung verlangen..... Bin gespannt wie die Bilanzen der Zentralbanken im Jahre 2009/2010 aussehen werden.....

New Credit Hurdle Looms for Banks WSJ
U.S. and European banks, already burdened by losses and concerns about their financial health, face a new challenge: paying off hundreds of billions of dollars of debt coming due.

At issue are so-called floating-rate notes -- securities used heavily by banks in 2006 to borrow money. A big chunk of those notes, which typically mature in two years, will come due over the next year or so, at a time when banks are struggling to raise fresh funds. That's forcing banks to sell assets, compete heavily for deposits and issue expensive new debt.

The crunch will begin next month, when some $95 billion in floating-rate notes mature. J.P. Morgan Chase & Co. analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That's about 43% more than they had to redeem in the previous 16 months.

The problem highlights how the pain of the credit crunch, now entering its second year, won't end soon for banks or the broader economy. The Federal Deposit Insurance Corp. said on Tuesday that its list of "problem" banks at risk of failure had grown to 117 at the end of June, up from 90 at the end of March. FDIC Chairman Sheila Bair said her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures. She said the borrowing could be needed to handle short-term cash-flow pressure brought on by reimbursements to depositors after bank failures.

The rates they'll have to pay if they want to issue new debt will be much higher than they were back in 2006. In July 2007, the interest rates on banks' floating-rate notes were only about 0.02 percentage point above the London interbank offered rate, or Libor, a benchmark meant to reflect the rates at which banks lend to one another. Today, that "spread" is at least two full percentage points for some banks.

via Bloomberg U.S. Says Banks on `Problem List' Rose 30% in Quarter

The U.S. Federal Deposit Insurance Corp. said its ``problem list'' of banks increased [to] 117 ``problem'' banks as of June 30, up from 90 in the first quarter and the highest since mid 2003 ... FDIC-insured lenders reported net income of $4.96 billion, down from $36.8 billion in the ame quarter a year ago.

> It seems to me that even the spread of 200 basispoints for lots of banks is not quite "rich"...... Especially when you add the lousy quality of their balance sheets..... Just take a look the another main sector besides residential is showing some kind of "stress"...... Hat Tip EconompicData

> Wenn man sich diese Meldung ansieht können einige Banken noch froh sein das die Spreads nur 200 Basispunkte betragen.... Ganz zu schweigen von der ansonsten oft sehr dürftigen Bilanzqualität...... Man muß sich nur einen zweiten Eckpfeiler neben dem privaten Immobiliensektor ansehen um zu erahnen das die Luft "dünner" wird..... Dank an EconompicData

As many banks compete for funds to pay off their borrowings, or sell assets to raise cash, their actions could exacerbate strains in financial markets. Banks that turn to shorter-term loans will have to renew their borrowings more frequently, increasing the risk that they won't be able to get money when they need it.

via Bloomberg Merrill, Wachovia Hit With Record Refinancing Bill

The increase in yields may cost them as much as $23 billion more in annual interest versus a year ago based on Merrill Lynch index data.

Standard & Poor's said last week that it had a ``negative'' outlook on almost half of the 50 highest-rated financial institutions in the U.S. as of June 30, the highest proportion in 15 years.

The difficulties with the floating-rate loans can be traced to the onset of the credit crunch last year. At the time, bank-affiliated funds known as structured investment vehicles, or SIVs, were among the first to suffer. Those funds had been buyers of the banks' floating-rate notes. But when SIVs were unable to find investors for their own short-term debt, the SIV market largely collapsed, taking a big chunk out of demand for new bank floating-rate notes.

The crunch comes as problems in the markets on which banks rely to borrow money are showing no sign of abating. In one gauge of jitters about banks' financial health, the three-month dollar Libor remains well above expected central-bank target rates for the same period.

Even at the higher interest rates, banks are having a hard time getting cash. The securitization markets that had allowed banks to repackage loans and sell them to investors remain all but shut. Banks today rarely make loans to one another for periods of more than a week, and even some so-called "repo" loans -- in which the borrower puts up securities as collateral -- are becoming more expensive.

At the same time, the pressures on limited resources of banks and investment banks are growing. Companies have been actively tapping bank credit lines set up before the credit crisis began, forcing banks to increase their lending at a time when they're trying to reduce risk. A number of big financial firms, including Citigroup Inc., Merrill Lynch, UBS AG, Morgan Stanley, J.P. Morgan, and Wachovia, have agreed to buy back some $42 billion of so-called auction-rate securities amid allegations that they misinformed retail investors about the securities' risks.

Central Banks' Role
All the strains have made financial institutions increasingly dependent on central banks in the U.S., the U.K. and Europe for loans to make ends meet. Many banks have been packaging mortgages into securities to use as collateral for financing from the European Central Bank and the U.S. Federal Reserve. Questions are cropping up about how long central bankers should prop up financial markets, and whether banks in Europe are taking undue advantage of the central bank's lending facilities.

On this topic..... Buy Freddie Paper With Fed Leverage via Dealbraker Hat Tip FT Alphaville

We don't know who bought the Freddie notes today. But buyers of Freddie notes who have access to borrowing from the Federal Reserve would have found the ecision to bid relatively easy. That's because the ability to exchange the Freddie debt for Fed cash means banks can buy Freddie debt with a huge amount of leverage, dramatically increasing the return on their capital.

Here's how it works. A bank that bought the six month notes from Freddie this morning could also bid to borrow from the Fed's Term Facility, which held an $75 billion auction today. As collateral for the borrowing, the bank could offer the newly purchased Freddie notes, for which the Fed would give them credit for 97% of their market value. Recently, the TAF pricing topped out at 2.35 percent for 28-day borrowing. So a bank buying $100 million of Freddie paper yielding 2.858% could flip it to the Fed, borrowing $97 million at around 2.4% (assuming the pricing will be slightly higher this time around).

At the end of the day, a credit desk could buy $100 million of Freddie debt for just $3 million down. On that $3 million, the desk would receive a 17.7% annualized return, or 8.8% over six months, for paper that is thisclose to being explicitly backed by the Treasury Department. Not a bad deal at all.

via Real Time Economics

But there is growing concern banks have become over-reliant on ECB funding, or may be abusing the situation. The ECB says it is monitoring developments and will, if necessary, adjust funding rules. Some financial institutions may have started to treat the ECB’s financing window as a substitute for a well-functioning structured finance market that has been largely shut since last August.

The share of asset-backed securities — or notes backed by repayments on debt such as mortgages or credit card loans — in the total collateral held with the national central banks in the 15-nation euro zone has risen to around 20%, from around 4% in 2004. At the same time, the share of government bonds has fallen sharply.

> Here the Fed´s balance sheet..... Hardly AAA.....

> Hier das grausige Bild der Fed Bilanzkomposition..........Sieht mir nicht mehr nach AAA aus.....

Mish has also something to say and is offering this must see chart Factors Adding to Reserves and Off Balance Sheet Securities Lending Program via Cumberland Advisors. Scary.....

Mish trifft mit seiner Aussage den Nagel mal wieder auf den Kopf und liefert gleichzeitig einen Blick auf die detaillierte Ansicht der Fed Bilanz. Nicht verpassen! Factors Adding to Reserves and Off Balance Sheet Securities Lending Program via Cumberland Advisors. Fuchteinflösend.....

"A the current pace, the Fed runs out of treasuries about a year from now. Things are about to get very interesting."

via Telepgraph Bank borrowing from ECB is out of control

One ECB source told The Daily Telegraph that over-reliance on the ECB funds has become an increasingly bitter issue at the bank because the policy amounts to a covert bail-out of lenders in southern Europe.

"Nobody dares pinpoint the country involved because as soon as we do it will cause a market reaction and lead to a meltdown for the banks," said the source.

This "soft bail-out" is largely underwritten by German and North European taxpayers, though it is occurring in a surreptitious way. It has become a neuralgic issue for the increasingly tense politics of EMU.

The latest data from the Bank of Spain shows that the country's banks have increased their ECB borrowing to a record €49.6bn (£39bn). A number have been issuing mortgage securities for the sole purpose of drawing funds from Frankfurt.

Got gold......?