Given the advance of the COVID-19 crisis in Europe and the uncertainty about its impact in economic terms, the risk premiums are rising rapidly in some of the countries of the Union and the European Central Bank tries to tackle it with new measures.
On this occasion, in line with the measures already adopted by the European body on April 7th to facilitate the use of collaterals in central bank discount operations, the ECB has decided to temporarily relax the credit rating criteria that Collaterals must meet to be eligible and, therefore, be discounted and provide liquidity. Specifically, the negotiable instruments or the issuers that were eligible until April 7th, to be clear, those which had a minimum rating of BBB- in addition to fulfilling the rest of the conditions, will continue to be eligible later, even if they suffer a decrease in their rating; as long as they don’t fall below BB. Except for securitizations or asset back securities whose minimum required rating was A- and now up to BB + is allowed.
These measures are temporary and will be applicable until September 2021. The objective of the ECB is to facilitate banks’ access to liquidity so that they, in turn, can continue financing businesses and households. In addition, this initiative aims to eliminate the procyclical impact of credit ratings since banks’ assets lose quality precisely at a time of crisis such as the current, when banks need to use those assets to obtain the liquidity from the ECB and continue financing their clients. In fact, the ECB advises that it may take additional measures in the future to continue mitigating the impact of the downgrades of credit ratings.
To continue with the EBA’s flexibility measures regarding various requirements on prudential valuation, FRTB report, SREP, recovery plans, etc. you can follow this link.
This measure joins those already adopted by the ECB itself and other European institutions in recent weeks and which can be found in this article.