The most important change is as follows (emphasis ours):
“The Eurosystem has abolished the eligibility requirement (Sections 184.108.40.206 and 220.127.116.11) that debt instruments issued by credit institutions, other than covered bank bonds, are only eligible if they are admitted to trading on a regulated market. At the same time, the Eurosystem risk control measures for marketable assets (Section 6.4.2) have been amended. Specifically, the Eurosystem has reduced the limit for the use of unsecured debt instruments issued by a credit institution or by any other entity with which the credit institution has close links. Such assets may only be used as collateral to the extent that the value assigned does not exceed 5% of the total value of collateral submitted (instead of 10%, as previously stipulated).”Essentially, the ECB has said it will accept debt instruments as collateral (in return for loans) even if there is no clearly regulated market for these instruments. It’s not initially clear exactly what instruments the ECB has in mind, but we have a few ideas, some of which would mark this as a substantial move by the ECB.
First off, the obvious ones are certain types of asset-backed-securities which banks have been holding onto since the financial crisis due to lack of market or demand for them. Secondly, it could be that this would allow the ECB to accept defaulted Greek debt, although this seems like a long shot since it would run counter to other direct provisions in the ECB’s collateral guidelines – this debate is likely to heat up over the next few days so we’ll keep you posted. There’s also the issue of some €30bn in Greek state backed bank bonds which the ECB had previously been wary of accepting as collateral, by some accounts – these would now likely be eligible (although given that Greek banks are now tapping the ELA, this is probably far less relevant).
In any case it will probably allow the ECB to accept further unmarketable assets and assign them a fairly arbitrary value based on its own determination. This will further add to the opacity and risk of the ECB’s balance sheet and allow for a transfer of risk away from the private sector onto the taxpayer-backed books of the ECB.
It's also interesting that the ECB saw the need to ease collateral requirements, since ECB President Jean-Claude Trichet has recently reiterated numerous times that he believes there is an abundance of collateral in the eurozone available for ECB liquidity operations.
The fallout from this ECB decision is far from clear as of yet, but it has the potential to be an important change and we’re sure it’s not the last we’ll hear about it.