The Governing Council of the European Central Bank (ECB) decided last week on additional enhanced credit support measures to support bank lending and liquidity in the euro area. In particular, the Governing Council proposed to conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year.
Among other measures, the central bank also accorded to reduce the reserve ratio, which is currently 2%, to 1% as of the reserve maintenance period starting on 18 January 2012. As a consequence of the full allotment policy applied in the ECB’s main refinancing operations and the way banks are using this option, the system of reserve requirements is not needed to the same extent as under normal circumstances to steer money market conditions.
The ECB has also increased collateral availability by reducing the rating threshold for certain asset-backed securities (ABS) and allowing national central banks (NCBs), as a temporary solution, to accept as collateral additional performing credit claims (i.e. bank loans) that satisfy specific eligibility criteria.
Have these moves been of any positive effect? Will they? According to Morgan Stanley analysts in Madrid,
“the refinancing auctions at 3 years are key in reducing systemic risk in the banking sector. We believe that these liquidity lines will have a potential demand of between €160bn and €250bn in the first December auction and will increase by the second auction in February. The relaxation of the collateral regulations and the new liquidity line in dollars should provide support for the refinancing of banks.”
They conclude by saying,
“We feel it is an opportunity for European banks, and especially for the medium-sized Spanish and Italian banks, that we hope will buy bonds to play this ‘carry trade’.”
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