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Law360, London (April 23, 2020, 12:29 PM BST ) The European Central Bank said that it will accept non-investment grade assets, including junk bonds, as collateral from banks looking to borrow money, making another concession to keep money flowing into the economy during the COVID-19 lockdown.
The ECB said on Wednesday that it will temporarily accept lower-rated assets as collateral when it lends money to banks in the euro area. The step is designed to ensure that banks have sufficient cash to lend to households and businesses to keep the economy working during the coronavirus outbreak.
Credit ratings agencies could be forced to downgrade company assets to junk if businesses struggle to remain profitable during the crisis. This would have meant that banks would not be able to use the assets as collateral when they borrow money from the eurogroup central bank — in turn raising the cost of borrowing for businesses and households.
But the ECB said that, as long as the assets met investment grade ratings from April 7, banks can continue using them as collateral even if they have since dropped down the ratings scale. But the assets must be in at least the upper tier of non-investment grade, which is two notches into the junk territory, the central bank said.
"These measures aim to ensure that banks have sufficient assets that they can mobilize as collateral with the eurosystem to participate in the liquidity-providing operations and to continue providing funding to the euro area economy," the ECB said in a statement on Wednesday.
The central bank said its move will ensure that assets that were considered investment grade, but which have since fallen in quality, remain eligible for banks to use as collateral in an attempt to encourage lending.
The measure will apply until September 2021, the ECB said.
The announcement follows measures set out by the central bank on April 7, which lower the threshold of what counts as collateral. The ECB said on Wednesday that these measures will also expire next September.
Under the measures announced earlier this month, lenders can now use more corporate and household loans, known as credit claims, as collateral when they borrow from the ECB.
Lenders can also use loans that they have made to governments, small and midsized enterprises and self-employed individuals as collateral, the Eurozone central bank said. The loans are usually seen by central banks as being of a lower credit quality.
The ECB has already relaxed some capital requirements for EU banks to encourage lending and offset the impact of the coronavirus crisis on the economy. The central bank also provided banks and borrowers with more access to credit if cash circulating in the financial system runs short.
--Editing by Ed Harris.
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