(For more on the European debt crisis, see EXT4.)

Feb. 1 (Bloomberg) -- The European Central Bank’s plan to accept more bank loans as collateral may not be used by all euro-region nations, threatening to fragment the rules applying to bank funding operations, said two euro-area officials with knowledge of the discussions.

The initiative is likely to be implemented on a voluntary basis by national central banks and several of them may opt out, said the officials, who declined to be identified because the information is confidential. Germany’s Bundesbank has indicated it may be among those to shun the measure, arguing the country’s banks don’t need to borrow more from the ECB. An ECB spokesman declined to comment.

“It contradicts the idea that all banks are treated equally in the euro area,” said Klaus Baader, co-head of economic research at Societe Generale SA in London. “It creates a two-class society. Central banks that take part are therefore identifying themselves as ones that are dealing with a weak banking system.”

The ECB is trying to improve funding access for banks in debt-strapped nations by widening the pool of eligible collateral at its market operations to include more bank loans. Citigroup Inc. estimates the total store of loans that could be used in market operations may be more than 10 trillion euros ($13 trillion).

While the ECB already accepts some credit claims, policy makers are trying to build on the success of their three-year loans to institutions and further soothe tensions in the euro area’s financial system.

Binding Rules

ECB Executive Board member Jose Manuel Gonzalez-Paramo said in New York on Jan. 24 that the rules would be binding on countries that sign up. An ECB spokesman declined to comment beyond the announcement of the planned change made on Dec. 8.

Surging bond yields, credit downgrades, and declining asset prices have reduced available collateral in some euro countries, forcing national central banks to set up special refinancing facilities for the countries’ banks.

ING estimates that alongside Ireland, Greece and Belgium are also operating Emergency Liquidity Assistance programs, in which banks can pledge assets as collateral that don’t qualify for regular ECB operations, paying more interest on the funds in return. The ECB thereby reduces refinancing costs for the region’s most troubled lenders.

As part of a loosening of collateral rules last month, the ECB said it planned to accept assets such as pools of bank loans, a measure that would take effect “as soon as the relevant legal acts have been published.”

Collateral List

If some central banks choose not to implement the initiative, which ECB President Mario Draghi said should be ready in time for the next three-year refinancing tender on Feb. 28, it would delay the process of harmonizing eligibility rules under the so-called “Single List” of collateral that can be pledged across the currency bloc.

Bundesbank board member Joachim Nagel indicated in an interview with the Sueddeutsche Zeitung published Jan. 21 that his institution may not take part. “German banks don’t need it,” he said.

The principle of sharing any losses on collateral across all members of the euro in accordance with their relative size will be suspended.

‘Temporary’ Solution

“The responsibility entailed in the acceptance of such credit claims will be borne by the national central bank authorizing their use,” the ECB said on Dec. 8, adding it is a “temporary solution.”

The move to force national central banks to assume the risk associated with the new collateral may stem from the Bundesbank, said Carsten Brzeski, an economist at ING Groep in Brussels.

“Limiting the liability reflects the strong influence of the Bundesbank, which is trying to avoid a ‘liability union’ within the euro zone,” he said.

Juergen Michels, chief European economist at Citigroup in London, said such moves go against “the European idea.”

“It’s a move from the better-situated countries which don’t want to take on any more risk from the periphery,” he said. “While it’s not the beginning of everybody for himself, it’s a small step in that direction.”

--Editors: Matthew Brockett, Simone Meier

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net