ECB opens door to accepting junk bonds as collateral

FRANKFURT, April 22 (Reuters) – The European Central Bank relaxed a key lending criterion on Wednesday, opening the way for banks to post collateral that was downgraded to junk during the coronavirus crisis, it said after an unscheduled Governing Council meeting on Wednesday.

The ECB said it would apply each asset’s credit rating as of April 7, so banks can continue posting them in lending operations as long as the bond’s rating remains in the upper tier of non investment grade assets.

“This ensures that assets and issuers that were investment grade at the time the Governing Council adopted the package of collateral easing measures remain eligible even if their rating falls two notches below the current minimum credit quality requirement of the Eurosystem,” the ECB said.

With the euro zone economy reeling amid the coronavirus pandemic, Italy and a whole range of companies face the risk of losing their investment grade credit rating, making it difficult for the ECB to lend to the real economy.

“The ECB may decide, if and when necessary, to take additional measures to further mitigate the impact of rating downgrades, particularly with a view to ensuring the smooth transmission of its monetary policy in all jurisdictions of the euro area,” the central bank said.

Banks who borrow the ECB’s ultra cheap funds need to post collateral so the easier rules aim to ensure that banks will have sufficient assets to borrow against and keep credit flowing to firms in dire need of cash.

The ECB lends cash to banks at rates as low as minus 0.75%, giving lenders a rebate if they lend on the funds onto companies. (Reporting by Balazs Koranyi Editing by Francesco Canepa)

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