MONEY MARKETS:THE EUROPEAN Central Bank last night paved the way for it to take a dramatically increased role in malfunctioning financial markets after announcing radical steps to boost funding for commercial banks.
The ECB will allow banks borrowing from it to put up a broader range of collateral, including assets with a lower credit rating than previously and denominated in currencies other than the euro.
Combined with previous pledges by the ECB to match demands by banks for liquidity, the measures are likely to result in a substantial increase in the total funds that it supplies - and the risks borne by the Frankfurt-based institution.
The central bank was moving into providing the financing of the banking sector in a major way, said Julian Callow at Barclays Capital. "The ECB is giving the plumbing system a reboot."
The package, which was bolder than expected, was promised by Jean-Claude Trichet, ECB president, after a summit last weekend of euro zone political leaders in Paris.
It amounted to the ECB's contribution to Europe's plans for averting a financial meltdown, which have seen national governments announcing large-scale bank bail-out moves.
The ECB gave no details about the scale of the expansion in eligible collateral - last year put at about €9,500 billion - but the increase is likely to be substantial.
Although the value of collateral available to banks has remained higher than the value of ECB operations, the measures appeared aimed at addressing problems some banks faced in obtaining sufficient liquidity.
"They are taking over the market in the sense that they are playing a larger and larger role in making sure that the liquidity flows abundantly. The hope is that they kick start the market," said Marco Annunziata, chief economist at Unicredit.
The latest announcement came just weeks after the ECB tightened eligibility criteria to tackle perceived abuses by some banks.
But ECB policymakers are likely to deny any U-turn by pointing out that the lower credit rating acceptable in the future on collateral will not apply to asset-backed securities.
It also said it would provide dollar liquidity in exchange for euro. - ( Financial Timesservice)
