Home > Uncategorized > The ECB eases on the sly!

The ECB eases on the sly!

From: Erwan Mahé (guest post)

21 March 2014

Today I received interesting news via the Twitter page of Lorcan Roche Kelly, who is much more of a ECB watcher than even I, so I thought it judicious to share this information straightaway. The analyst was also kind enough to provide me the link to the ECB reference text which enabled me to dig a bit deeper into the matter by comparing it with the prior text.

In a nutshell, the ECB, without the slightest bit of hoopla, has just modified certain rules governing the Eurosystem’s collateral eligibility criteria. These moves constitute an easing on two scores:

·        ABS containing credit card receivables will now be eligible;

 

·   National central banks (NCBs) will no longer be able to reject bank bonds from Irish banks guaranteed by the country.

This latter measure stems from the fact that Ireland is no longer deemed to be a country “under programme”, thus bolstering the value of the Irish government’s guarantee.

In contrast, since Greece and Portugal remain “under programme”, the NCBs are still allowed to turn down this type of bond if it is backed by national governments.

One thing is for sure: the recent success of Piraeus Bank’s unsecured bonds augurs for even better issuance conditions for Irish banks!

 Although this measure on Ireland makes perfect sense, with its automatic character sending no particular message about the ECB’s direction, its ABS decision is more interesting, since it amounts to a purposeful easing of eligibility criteria and thus of the central bank’s monetary credit position.

 I still do not have the measures needed to quantify in billions of euros what this sector within the ABS universe represents but I am working on it. And something tells me that some of my readers might be able to shed some light on the matter.

Nonetheless I think it important to provide you this information now and then come back to the topic later. In any case, it is a positive factor, both for banks and for the transmission of the ECB’s monetary policy to the real economy!

I have long argued that it is much easier for the ECB to ease its monetary credit policy by relaxing its eligibility criteria by intervening directly on the ABS market.

In a QE programme, the interest revenue received on assets acquired by the central bank amount to revenue drawn from the private sector. It is for this reason that, Ceteris Paribus, the QE is not inflationary, quite the contrary, since it acts as a tax.

In contrast, in a central bank organised refinancing programme, such as the one we are discussing, the revenue generated by eligible assets are kept by the private sector whilst being financed by the ECB’s refi rate.

 Whilst the impact is thus similar in terms of the asset’s (upward) price direction, the macroeconomic consequences are not at all the same. What may be deemed a tax in the case of a QE becomes a subsidy in the refi’ case!

 I cannot resist rehashing Mr Noyer’s collateral criteria comments via the attached video: start from 1 hour, 12:45.

“Re-Examining Central Bank Orthodoxy for Un-Orthodox Times Session III”

I attended this debate organised by the GIC at the Bank of France headquarters in March 2012, and I hope that you will also appreciate the little challenge Mr Noyer made to Mr Weber, who was still President of the Bundesbank at the time, on the subject of Lehman’s default with the Buba to which all NCB then had to subscribe.

The most revealing part came during the Q&A session when Mr Noyer, in reply to a question about the risk taken by the ECB which had eased it collateral eligibility criteria:

 “We can still ease much more than that”.

 So does this measure announced in the new ECB memorandum constitute a first step in this direction?

Why doesn’t our central bank, which has come under such withering criticism for its lack of reactivity, communicate more clearly on this topic?

Mysterious.

That will be all for today. I wish you all a good weekend.

  1. Lyn Eynon
    March 23, 2014 at 10:34 am

    I disagree that QE acts as a tax through the interest revenue on assets acquired by the central bank being drawn from the private sector. A tax is a compulsory levy without direct compensation but under QE interest-bearing assets are voluntarily sold. Hence the price paid must at least equal the market value of those assets, taking account of expected interest payments and the risk of holding the asset. There is no tax on the private sector here.

    Indeed, as QE increases demand directly for purchased asset classes and indirectly for other classes (through diverted private demand), the effect must be to increase asset prices, at least in comparison to those that would exist without QE. This inflationary effect is evident in the rise in share and asset markets since QE was initiated, even though its impact on retail price indices is muted.

  2. Erwan mahe
    March 23, 2014 at 10:39 am

    Lyn, you seem to confuse asset prices going up with inflation. And QE is mandatory, the FED has an objective Of réserves infusion, the private Sector must sell to the fed!

    • Lyn Eynon
      March 25, 2014 at 7:19 am

      I noted that the impact on retail price indices of QE has been limited, as is to be expected as its effects are indirect through spending effects resulting from increases (or slower reductions) in the value of accumulated pension pots or houses. I concur that asset prices are not normally included in measures of inflation, although central banks would have behaved more responsibly during the internet and financial booms if they had considered these rather than just consumer indices.

      QE is mandatory for the Federal Reserve but not for any actor in the private sector. The Fed has to buy but nobody is obliged to sell. The only way it can achieve this objective is by paying a market price for the assets it purchases and that increased demand must raise or at least sustain asset prices. This is a declared objective and while it may have staved off financial collapse it has also accentuated wealth inequality, which other methods of fiscal or monetary stimulus need not have done.

  3. March 24, 2014 at 8:13 am

    Please note that your link to “prior text” goes to a password protected mail account.

  4. March 24, 2014 at 10:26 am

    Note that ABS containing credit card receivable have already been eligible before, as can be seen in the following ECB press release:

    PRESS RELEASE
    19 September 2013 – ECB implements loan-level reporting requirements for asset-backed securities backed by credit card receivables
    The Governing Council of the European Central Bank (ECB) has decided to introduce loan-level reporting requirements for asset-backed securities (ABSs) backed by credit-card receivables, when these are used as collateral in the Eurosystem’s monetary policy operations.
    The requirements will be as follows:

    Loan-level data must be provided on the basis of the template available on the ECB’s website, at least on a quarterly basis or within one month of, the interest payment date of the instrument in question.

    The provision of loan-level information for these instruments is mandatory as of 1 April 2014, with a nine-month phasing-in period. Where loan-level data are incomplete on 1 April 2014, they must gradually be completed in the course of the phasing-in period.

    To enable effective reporting of loan-level data, the credit card cash flow-generating assets backing an ABS must all belong to the same asset class – i.e. the ABS’s underlying assets must consist of a homogeneous pool, so that loan-level data can be reported in a single template that matches the underlying assets.

    ABSs backed by credit card receivables that do not comply with the loan-level data reporting requirements because they consist of mixed pools of heterogeneous underlying assets and/or do not conform to any of the loan-level templates will remain eligible for use as collateral until 31 March 2014, subject to compliance with all other applicable provisions.

    Compliance will be monitored according to the specific requirements set out in the general provisions governing the Eurosystem’s collateral framework (Guideline ECB/2011/14 as amended by ECB/2012/25).
    This decision will enter into force with the relevant legal instrument(s). The contents of the credit card ABS template published today remain subject to potential adjustments until that time.
    Further details on the ECB’s initiative regarding loan-by-loan information requirements for ABSs are available on the ECB’s website. The loan-level data requirements were announced on 16 December 2010.

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