The European Central Bank has introduced a fresh restriction on the collateral that banks can use to gain access to central bank cash, a measure that is most likely to affect lenders in struggling "peripheral" euro zone economies.
The curb is a sign of the ECB's unease at banks' growing use of government-guarantees on their own bonds to make the securities eligible as central bank collateral. Banks borrowing from the ECB must pledge collateral in return and banks' own bonds would not be eligible without government guarantees.
The practice has come to be seen as a cheap way for banks to get access to ECB cash – and for governments to help them to do so – but has raised risks for the central bank accepting such guarantees.
Financial markets are waiting to see if the ECB will announce further measures this week to help euro zone banks, perhaps to underline support for last week's EU leaders' summit agreement. It is widely anticipated that the central bank will cut its main policy interest rate to a historic low of less than 1 per cent amid indications of a deteriorating outlook for the economy.
The quality of the collateral being accepted by the ECB – and the risks it is running as a result – has increasingly become a point of debate during the crisis, with Germany's Bundesbank particularly concerned about what it believes are insufficiently rigorous standards being applied.
Last week the ECB made a move to loosen its collateral standards on asset-backed securities, broadening the scope of the securities it will accept to try to improve the access of some banks – particularly in Spain – to central bank cash.
Tuesday's announcement on government-backed bonds does not mean banks will have to withdraw such bonds from ECB operations. But they will not be allowed to post a greater volume of such bonds than they have already.
The ECB's announcement also explicitly refers to guarantees from any "public sector entity with the right to impose taxes" – a seemingly deliberate attempt to signal that it would still accept bonds guaranteed by EU bail-out funds. These funds, the European Financial Stability Facility and its successor European Stability Mechanism, are set to play a role in providing aid to prop up Spain's banking system.
The ECB said banks might still be able to use more bonds with government guarantees if they obtained the approval of its governing council and presented a plan to fund themselves.