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Euro Jumps As ECB Loosens Collateral Rules For Banks

Euro Jumps As ECB Loosens Collateral Rules For Banks

Tzu-Wen Chen, Technical Strategist

THE TAKEAWAY: [ECB eases collateral rules] > [Gives Spanish banks liquidity boost; allow banks to make greater use of ABSs] > [EURUSD strengthens]

The European Central Bank (ECB) announced its decision today to loosen collateral rules in a bid to improve funding access. This concession will give Spanish banks a much-needed liquidity boost and allow banks to make greater use of asset-backed securities when accessing ECB funds.

The Bank released a statement, saying “The Governing Council has reduced the rating threshold and amended the eligibility requirements for certain asset-backed securities (ABSs). It has thus broadened the scope of the measures to increase collateral availability which were introduced on 8 December 2011 and which remain applicable”.

These new measures will allow acceptance of assets that have ratings as low as ‘BBB’. Securities covered under the changes include auto loans, leasing and consumer finance ABSs, ABSs backed by commercial mortgages (CMBSs), residential mortgage-backed securities (RMBSs),and securities backed by loans to small and medium-sized enterprises (SMEs). Haircuts will range from 16 percent for ‘A’ rated securities to 32 percent for ‘BBB’ rated assets. Prior to these changes, collateral rules only allowed acceptance of ABSs with a minimum rating of ‘A-’, with a haircut charge of 16 percent for all securities.

EURUSD 1-minute Chart: June 22, 2012

Euro_Jumps_As_ECB_Loosens_Collateral_Rules_For_Banks_body_Picture_1.png, Euro Jumps As ECB Loosens Collateral Rules For Banks

Chart created using Market Scope – Prepared by Tzu-Wen Chen

The euro strengthened against the U.S. dollar after the ECB’s announcement to ease collateral rules, which will help ease pressure on the Spanish banking sector. The euro rose from pre-announcement levels of $1.2528 and at the time of this report, was trading higher at $1.2568 against the greenback.

--- Written by Tzu-Wen Chen, DailyFX Research

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.