The European Central Bank has revealed the hierarchy of bank pain in the euro zone. Just seven euro zone countries have signed up to take part in the central bank's looser collateral rules for lenders. The good news is that the ECB can now aim its cheap three-year loans at the countries where they're needed most. The bad news is that the recipients may not appreciate the exposure.
Banks in Portugal, Ireland, Spain, Italy, France, Austria and Cyprus will now be able to pledge a broader array of single loans to their national central banks in return for cash. According to the ECB, the shift will free up roughly 600 billion euros of collateral, though hefty haircuts mean banks will actually be allowed to borrow less than a third of that sum. The rules also differ by country; France's central bank will accept dollar-denominated assets and lower-quality loans, Spain will allow claims on the public sector, while Italian banks will be able to borrow against factoring or leasing contracts.
The new rules may help ease the credit crunch caused by a freeze in Europe's interbank and wholesale funding markets. Though the ECB's first three-year facility, unveiled in December, helped revive funding markets, credit conditions are still tight. The changes should also help smaller lenders which could not benefit from the ECB's previous largesse because they had run out of acceptable collateral.
The latest crisis-fighting measures take the ECB further into uncharted territory. Though its governing council has screened the new rules and will closely monitor their implementation, the risks will be borne by national central banks. That's necessary to reassure other countries that they won't become a rubbish bin for hard-to-value assets lurking in the balance sheets of peripheral lenders.
But the ECB's move underscores the growing polarisation between banks in troubled euro zone countries, and those in states where sovereign strains are less pronounced. It also risks ushering in a multi-tiered market, where banks pledge their best assets to each other, more standardised ones to the ECB, and esoteric loans to their own national central banks. If a lender ever fails, there will be one hell of a mess.
