03 April 2015

Reuters: ECB says national central banks have flexibility on QE bond loans

The ECB laid out plans on April 2 to make bonds bought in its 1 trillion-euro stimulus programme available for borrowing, but said national central banks would have some flexibility in how they applied them.

As part of a plan to keep its 1 1/2-year quantitative easing plan from distorting bond markets, the ECB set out a 'securities lending' framework that will initially see itself and eight of the 19 national euro zone central banks lending bonds.

The ECB's own framework includes a fixed borrowing term of one week with an option to roll over any individual bond loan three times. It also sets a number of other limits on the amounts that can be borrowed.

Amid concern that a shortage of bonds could still occur in markets like Germany, where the ECB is buying up large quantities, an ECB spokesman said national banks would have "some flexibility" to adapt the framework. Few details were available of what that flexibility would be.

Ensuring there is no shortage of bonds is particularly important for 'repo' markets, which are used by banks and other financial firms as a key source of funding and require bonds to be provided as collateral.

Bond traders said the limits imposed by the ECB's framework may not relieve the current soaring cost of borrowing German government bonds in repo markets -- a trend that threatens to clog up Europe's financial system.

The ECB also appeared to have accelerated the lending plans. The bank said last month it would start the process gradually but minutes from its March meeting published on Thursday showed some policymakers had concerns about a shortage of bonds.

The ECB's framework only allows its bonds to be lent out if other bonds are pledged as a deposit -- so it will not overall add to the number of bonds in circulation.

Full article

© Reuters