German Newspaper Accuses Spain’s Central Bank of Hiding Collateral Risks from ECB
Shoddy collateral labeled “ECB-eligible” is a great deal for banks.
Since the financial sectors of Southern Europe and Ireland hit the rocks during the height of Europe’s sovereign debt crisis, many of their respective banks have grown dependent on the generosity of the ECB – a generosity that, as Greece recently learned to its great cost, has its limits.
In the last three years, the banks of Europe’s biggest bailed out economy, Spain, have received ultra-low interest loans from the ECB worth some €140 billion. To obtain that liquidity, the banks are required by law to deposit collateral with the ECB. However, Germany’s leading business and financial newspaper Handelsblatt now reveals that some Spanish banks have received special treatment from Spain’s central bank, the Banco de España, some of whose officials have shown no qualms about bending the rules:
Handelsblatt has learned that the Spanish central bank repeatedly stretched the ECB rules recently. It approved securities as collateral that were not sufficiently creditworthy. In addition, other bonds were “ECB-eligible,” but the discount on those bonds should have been higher than it was and the amount of money received in return lower.
This Spanish laissez-faire attitude has consequences for the rest of Europe. On the one hand, it exposes the ECB to the risk of being left with low-quality securities in the event of a bank failure. This would ultimately become a burden for European taxpayers.
On the other hand, it is advantageous for banks if their securities are unjustifiably classified as “ECB-eligible,” because such bonds are easier to sell and at good prices.
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