Podcast: the ECB’s collateral framework expansion

As the Covid-19 pandemic wrought havoc in markets, central banks such as the US Federal Reserve and the European Central Bank (ECB) expanded their collateral frameworks.

The International Monetary Fund identified three ways in which central banks did this: by introducing new asset types, relaxing mitigation measures and introducing credit claims under dedicated government guarantee programmes.

Central Banking speaks to Lias Hammouche, global head of financial and collateral services at BNP Paribas, to talk about the effects of the ECB's decision to preserve liquidity in the financial system. 

When markets are in crisis and there is high volatility, this creates liquidity stress due to collateral scarcity, Hammouche says.

The ECB made more assets eligible under the targeted longer-term refinancing operations (TLTRO) programme. There were better concentration limits – the amount of exposure a lender has to a single source – and lower haircuts. Haircuts are the reduction applied to the value of an asset.

Hammouche talks about how his team adapted to the ECB's changes and discusses the effect of expanding the collateral framework on the issuance of financial assets.

The coming years will see a reversal of these measures. "Haircut reductions will be scaled back, we will see the end of temporary mitigation of effects from rating downgrades, the end of increased concentration limits on unsecured banks depths, and the end of temporary extensions of the ACC [additional credit claims] framework", Hammouche says. 

Index

0:07 Introduction 

0:57 Market conditions that led to the ECB's collateral framework expansion

2:07 Changes to the collateral framework 

3:52 Adapting to the ECB's changes

6:14 The effect of expanding the collateral framework on the issuance of financial assets

7:14 Planned end to remaining collateral easing measures

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