ECB Eases Collateral Rules as Banking System Runs out of Assets

From the Wall Street Journal,

The European Central Bank said Friday it will widen the range of securities it will accept from euro-zone banks in exchange for its loans with the aim of helping boost lending to companies and households.

The ECB will now accept certain mortgage-backed securities, car loans and loans to small and medium-size firms.

The measure is seen as an attempt by the ECB to provide much needed liquidity to Spanish banks, which possess a large quantity of mortgage-backed securities after its real-estate bubble burst. Spain's government is expected to submit a formal request Monday to the European Union for a bailout of up to €100 billion ($125.4 billion) to help recapitalize its distressed banks. On Thursday, two independent consulting firms submitted results of stress tests conducted on 14 Spanish lenders, which put total capital need for the banking sector of Spain at up to €62 billion.

The ECB's step will reignite worries over a deterioration of the ECB's balance sheet, which is already at an all-time high after the ECB injected more than €1 trillion into the region's banking system in December and February to avert a credit crunch.

The German central bank, the Bundesbank, which has repeatedly criticized the ECB for the continued easing of its collateral rules as the euro-zone's debt crisis deepened over the past two years, was quick to respond.

This practically is an admission of the depletion of assets as collateral for loans in the Euro’s banking system.

And this also implies that ECB has been stuffed with ‘toxic’ assets and how rules has been easily changed or altered to accommodate interests of the political class and of the economic interests of the privileged politically protected few.

Eventually, the ECB may resort to directly accepting equities (or even commodities) as collateral.

Also, collateral rule adjustments may be a precursor to a coming 'shock and awe' policy coming from the ECB that would likely have a short lived 'buy another day' outcome.

All these reveals of the extent of desperation by EU officials, and more importantly, the current heavy state of distortions in the global financial markets.