Bloomberg News

ECB Said to Weigh Bigger Loans for Collateral Disclosure

October 21, 2011

(Adds finance ministers’ meeting in eighth paragraph.)

Oct. 21 (Bloomberg) -- The European Central Bank may lend more money against asset-backed bonds if issuers provide additional information about the loans underpinning the securities, according to a person familiar with the matter.

Banks can borrow money from the ECB’s liquidity facility by posting collateral, with a discount applied depending on its perceived safety. The bank’s Eurosystem Risk Management Committee is discussing lowering the reduction on asset-backed bonds from the 16 percent levied now, said the person, who declined to be identified because the talks are private.

The proposed change is part of a broader ECB initiative to encourage banks to improve transparency in asset-backed bonds they sell to investors and boost confidence in a market blamed for worsening the credit crisis in 2007. The Frankfurt-based lender also said last year that it was seeking ways to control the quality of the assets it takes in as collateral for loans to financial institutions.

“The ECB loan-level data project will enhance transparency and standardization on the collateral, so that’s welcome,” said Paolo Binarelli, a fund manager at P&G SGR Alternative Investments SpA in Rome, which oversees 1 billion euros ($1.4 billion) of assets. “The key point is that the cost of disclosing that information mustn’t be too high.”

Niels Buenemann, a spokesman for the ECB in Frankfurt, declined to comment.

Subprime Crisis

The seizing-up of the market for bonds backed by U.S. subprime mortgages four years ago was one of the triggers for the worst credit crunch in generations and prompted investors to shun hard-to-value securities. Sales of asset-backed bonds remain depressed in Europe, and the ECB hopes that forcing banks to give more information about the deals will help re-ignite issuance.

Financial institutions issued 245 billion euros of asset- backed debt this year, compared with 510 billion euros the year before the subprime meltdown, according to data compiled by Bloomberg. Of this year’s total, 66.5 billion euros, or 27 percent, of the bonds were sold to investors, with the rest retained for loan collateral and other purposes, JPMorgan Chase & Co data show.

The ECB is considering ways to improve disclosure in the asset-backed securities market at a time when European government ministers meet in Brussels to try and find a solution to the region’s sovereign debt crisis.

Government Bonds

The ECB currently applies a discount of as much as much as 10.5 percent on fixed-rate government bonds it takes in as loan collateral and up to 39.5 percent for corporate securities.

The ECB committee will propose the reduced rate for asset- backed securities at a meeting in November, after which the board will discuss the plan, said the person with knowledge of the talks. The central bank already aims to solicit more information about the underlying loans packaged into bonds, and the lower discounts would be given in return for an additional level of disclosure on top of that, the person said.

The ECB is planning a series of presentations about the loan-level data program as a whole starting in Paris today, according to its website.

--With assistance from Emma Ross-Thomas in Madrid. Editors: Paul Armstrong, Andrew Reierson

To contact the reporters on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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