When the Eurosystem lends money to banks, it does so against adequate collateral. Every day the ECB publishes a list of thousands of marketable assets, such as government bonds, that all national central banks accept as collateral. The Eurosystem also accepts non-marketable assets as collateral, mostly in the form of so-called credit claims. These claims can include loans granted by banks to companies or the public sector, on which banks then have a claim for repayment. The Eurosystem’s very broad set of acceptable collateral is designed to ensure that banks from different countries and with different business models generally have enough collateral to access Eurosystem liquidity.
To ensure that banks have full access to central bank liquidity, even in adverse circumstances, the Eurosystem made it possible for national central banks to temporarily accept additional types of collateral. This allows them to take into account specific conditions in their respective countries, such as the types of collateral available or special legal and operational circumstances.
Additional credit claims (ACCs) are an example of the types of assets temporarily eligible as collateral. ACCs are credit claims that do not fulfil all the eligibility criteria applicable under the general collateral framework. The general Eurosystem collateral framework includes loans to the public sector, corporates, and small- and medium-sized enterprises (SMEs). Beyond that, ACCs can include loans to households as well as pools of similar kinds of loans, consisting of, for instance, corporate, SME loans, consumer loans or mortgages. ACCs can also be of lower credit quality than the generally accepted credit claims or be denominated in currencies other than the euro. To compensate for the associated higher risks, the national central banks impose higher valuation haircuts. This means the national central bank assigns to the ACC a value below its nominal value to have a buffer against potential changes in the collateral value. The maximum that a bank can borrow in Eurosystem credit operations is based on its total collateral value after haircuts.
The rules governing the use of ACCs differ somewhat across countries. These are referred to as ACC frameworks. Every national central bank is free to set up a country-specific ACC framework, which however must be approved by the Governing Council on the basis of a common minimum risk control framework. The possibility of implementing ACC frameworks was introduced in December 2011, as part of the enhanced credit support measures to support bank lending during the financial crisis. The option remains open until the end of the third round of targeted longer-term refinancing operations (TLTRO III) in March 2024.
How were ACC frameworks extended in response to the COVID-19 pandemic?
On 7 April 2020 the ECB Governing Council decided to temporarily allow an extension of the ACC frameworks with the possibility for national central banks to include loans backed by COVID-19-related public sector guarantees to corporates, SMEs, self-employed individuals, and households. Without these guarantees the loans would be subject to higher risk-related haircuts or would not be eligible under the ACC frameworks at all. At the same time, the Governing Council decided to reduce the valuation haircuts, thus accepting a temporary increase in residual risk, namely the risk that a bank defaults and that the collateral liquidation value fails to cover the exposure. The Governing Council further decided to temporarily reduce the frequency of loan level reporting to somewhat lower the potential burden for banks and to expand the list of sources that are permitted to evaluate ACCs from a credit quality perspective.
Why were these changes adopted now?
In response to the COVID-19 pandemic, many euro area Member States set up specific government or public sector guarantee schemes to help their economies. National central banks can, to a certain degree, now accommodate these guarantee schemes, which often do not comply with the Eurosystem’s general eligibility requirements for guarantees. Some of the new guarantees, for example, are partial.
Which euro area national central banks have put in place an ACC framework?
So far, 17 national central banks have implemented ACC frameworks: the Nationale Bank van België/Banque Nationale de Belgique, the Deutsche Bundesbank, Eesti Pank, the Central Bank of Ireland, the Bank of Greece, the Banco de España, the Banque de France, the Banca d'Italia, the Central Bank of Cyprus, Latvijas Banka, Lietuvos bankas, the Central Bank of Malta, the Oesterreichische Nationalbank, the Banco de Portugal, Banka Slovenije, Národná banka Slovenska and Suomen Pankki – Finlands Bank. More national central banks are expected to do so. The extended frameworks support banks’ use of Eurosystem credit operations, among others the TLTRO III, and enable them to submit more loans as collateral, notably loans benefitting from guarantee schemes related to the COVID-19 crisis.
How is the extension of the ACC frameworks expected to help the real economy?
ACC frameworks have incentivised the acceptance of loans to smaller businesses and self-employed and private individuals as Eurosystem collateral for years. The temporary extension of ACC frameworks now allows the further easing of certain requirements for the acceptance of such loans. This can help banks to provide loans to the real economy, including to smaller borrowers, during a time of severe economic stress with low or no revenues, and to refinance these by borrowing from the Eurosystem for up to three years at interest rates that are currently negative. In turn, this should help SMEs as well as self-employed individuals, in particular those that benefit from specific government guarantee schemes, to keep their businesses running and to maintain or expand their bank financing during these difficult times.
Source: European Central Bank
Published: 15 May 2020
Updated: 14 January 2021
The above presentation was created for educational purposes.