ECB Said to Start Consulting Banks, Investors on Collateral

By Esteban Duarte and Gabi Thesing

Dec. 17 (Bloomberg) -- European Central Bank officials are moving closer to forcing banks to provide more information about the collateral they give the ECB in return for loans.

ECB policy makers may today approve the start of a consultation process with banks, investors and market participants asking them to suggest how residential mortgage- backed securities can be made more transparent, according to two people involved in the process. The Governing Council meets today in Frankfurt.

The ECB is trying to better monitor the quality of the assets it’s holding in return for the funds it’s pumped into the European banking system during the crisis. European banks have created about 1.1 trillion euros ($1.6 trillion) of asset-backed securities since June 2007, which they can use as collateral for ECB loans.

The ECB’s push “will increase transparency for investors and better information will attract new investors,” said Dipesh Mehta, a London-based securitization analyst at Barclays Capital. “U.S. investors already find the European transactions hard to look at without loan by loan data.”

Banks, investors and other market participants have about two months to comment, the people said. An ECB spokeswoman declined to comment.

ECB Vice President Lucas Papademos said on Dec. 12 the bank plans to take steps to help revive the asset-backed bond market which was dormant for more than a year until September, when Volkswagen AG and Lloyds Banking Group Plc sold investors 1.7 billion euros ($2.5 billion) of the securities.

Arrears

Under the terms of the collateral consultation, officials want banks to provide information about individual loans such as the value of the property backing a mortgage, details on cash flow and whether the borrower is in arrears, the people said.

Banks in Europe have pledged about 217 billion euros of asset-backed securities as collateral at the ECB, Barclays Capital estimates.

The ECB has already tightened the rules for asset-backed securities it accepts as the central bank moves toward unwinding its emergency liquidity measures. The ECB said Nov. 20 it wants to ensure “high credit standards” are met and aims to restore “the proper functioning of the ABS market.”

Banks have used asset-backed bonds, notes secured by mortgages and credit card bills, more than any other type of debt as collateral in exchange for ECB funding.

The ECB has used money market operations as one of its main policy tools in response to the financial crisis. The ECB yesterday said it loaned banks 96.9 billion euros at its last tender of 12-month funds, more than the 75 billion euros forecast by a Bloomberg News survey of economists.

The ECB may also approve a similar consultation on the securities backed by the loans of small-and-mid-sized companies and commercial mortgages, said the people.

To contact the reporters on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net.