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Basel Committe fail to sign off on latest bank reform measures

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Banks, Financial

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Categorized | Economy

Draghi hints at changes to eurozone funding market rules

Posted on November 28, 2016

Policymakers at European Central Bank are aware of a funding squeeze resulting from its landmark bond-buying programme, Mario Draghi said, hinting the central bank could move to ease problems being created in the smooth functioning of financial markets as early as next week.

In the wake of reports that the ECB was willing to tweak its collateral re-lending rules to alleviate funding stresses faced by some market participants, Mario Draghi told a committee of MEPs the central bank’s operations were “falling short of what was optimal” in recent weeks.

The ECB’s landmark QE programme – which has snapped up €1.1tn of government debt since March 2015 – has led to a shortage of high-quality collateral needed by banks to secure loans in the single currency area’s short-term funding (“repo”) markets.

In order to ease the crunch, the ECB has been lending the bonds it buys back to investors since 2015.

This Securities Lending Programme was “very, very important for the well-functioning of the financial markets” said Mr Draghi.

The Italian said policymakers frequently revisited the framework to loan out its stockpile of debt on a 12 to 18 month basis. Hinting at looming changes, he added that recent limitations meant the framework was being “gradually upgraded”.

“It’s recognised as a need to do”, Mr Draghi said, speaking ahead of the ECB’s December meeting next Thursday, where policymakers are expected to extend their €80bn-a-month bond-buying measures beyond March 2017.

Benoît Cœuré, a member of the ECB’s executive board, said earlier this month that securities lending could be “scaled up” and that it was “well within central banks’ operational capacity to play a more structural role in supplying safe assets to the financial system”.