The European Central Bank will announce changes to the rules governing its money-market auctions in coming weeks to lead off the risk of abuse by financial institutions, council member Yves Mersch said.
"At the margins there can still be cases where you see dangers of gaming the system,'' Mr Mersch said in an interview, saying that the Governing Council has been discussing the issue and has agreed on a certain amount of refinement to the existing rules.
ECB officials have become increasingly concerned that banks are taking advantage of collateral rules that are broader than those used by the Federal Reserve and the Bank of England. The danger is that banks struggling to sell securities damaged by the credit-market turmoil will dump them on the ECB and become overly reliant on central-bank funds.
"It's not a broad-based revolution," said Mr Mersch, who is attending a meeting of central bankers and financial officials organised by the Fed.
"We are satisfied with our framework. But since there are always on the margins evolutions, we have to adjust our framework regularly to market practices."
Mr Mersch said the precisions planned by the ECB "concern some instruments", but declined to elaborate. Unlike the Fed and the Bank of England, the ECB hasn't had to change its operation rules since the credit crisis began.
"The ECB is in an unenviable situation," said Paul McCulley, a fund manager at Pacific Investment Management. "The lender of last resort should be just that, a last resort, and not a permanent provider of funds to the private sector."
Central bankers including Federal Reserve Chairman Ben Bernanke met in the Teton Mountain retreat at the weekend to discuss ways to address the past year's credit rout.
Spain's banks in particular are struggling to attract investors as a decade-long property boom ends and mortgage delinquencies soar to the highest in at least six years. Investors demand higher rewards to buy bonds backed by Spanish mortgages than any other home loans in Europe. The ECB lent Spanish banks a record €49.4 billion in July.
The ECB's money-market system is also attracting demand from outside the euro region. The Frankfurt-based central bank said in June it will accept asset-backed bonds sold by Macquarie Group, Australia's biggest securities firm, and backed by Australian consumer loans as collateral.
UK mortgage lender Nationwide Building Society said August 18th it's planning to expand into Ireland to take advantage of "funding opportunities". Banks with operations in the countries sharing the euro can raise funding from the ECB by pledging certain types of collateral including asset-backed securities. Bonds backed by mortgages and other assets accounted for 18 per cent of the ECB's loan collateral at the end of 2007, up from 4 per cent in 2004, Fitch Ratings data show.
"It has been suspected for some time that banks could be taking advantage of the broad collateral framework since they no longer publicly place asset-backed securities and these securities now only serve as collateral in central bank funding," Michael Schubert, an economist at Commerzbank in Frankfurt, wrote in a note to investors today.
"This means that a necessary market correction in the ABS segment is being put off."
Bloomberg