ECB should curb bank access to cash as it exits crisis mode, Mersch says

FRANKFURT (Reuters) – The European Central Bank should tighten bank access to its cash once inflation in the euro zone reaches its goal and its stimulus measures are gradually withdrawn, ECB board member Yves Mersch said on Friday.

Mersch said that lax rules on what collateral banks can use to borrow from the ECB, introduced during the 2010-12 euro zone crisis, should be strengthened and some criteria regulating bond purchases also need changing.

The ECB was widely expected to announce this summer that its 2.55 trillion-euro ($3.0 trillion) bond-buying program would end this year and to hint it would raise interest rates in 2019, the first increase in eight years.

“As we head down the path of monetary policy normalization, we will have to decide whether some temporary measures need to be jettisoned, included in a state-contingent framework, or transformed into harmonized, more permanent measures,” Mersch said.

Specifically, he said rules allowing national central banks to accept bank loans as collateral would need to be scrapped or made the same for the whole of the euro zone.

Permission for banks to borrow against some asset-backed securities, such as government-guaranteed bundles of loans, should also be reviewed, Mersch added.

Any change would be felt slowly, since banks have secured some ECB funding until 2021 at multi-year auctions.

“We did all this to achieve a specific monetary policy goal; but once we reach that goal and liquidity demand declines, there should be less need for those exceptional measures to continue,” Mersch said.

“Of course, they will remain ‘on the shelf’ to be used again, as necessary, to fulfil our monetary policy aim.”

He added the ECB would rely more on its own knowledge as the euro zone’s top banking supervisor when lending to banks and become more demanding with the ratings agencies it uses.

Turning to the ECB’s stimulus program, Mersch added “some criteria and risk control parameters may warrant recalibration” after its stops making new purchases, without providing more detail.

Godfried De Vidts, who chairs a European industry body focusing on collateral, welcomed the ECB’s plans to normalize its framework, provided that this is done gradually.

But he cautioned the market for collateral in the euro zone would remain fragmented as long as each euro zone government issued its own debt, resulting in different credit ratings and, therefore, valuations when a bank uses it as collateral.

“Until we come to a single euro zone sovereign bond issue, we have to accept there will be differences,” said De Vidts, chair of the International Capital Markets Association’s European repo and collateral council.

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