Q&A: ECB’s Special Measures Made Easy

by Alen Mattich

Wall Street Journal
December 8, 2011

The European Central Bank cut its key market interest rate by a quarter point and announced a series of special measures at its monthly policy meeting on Thursday. The measures included a move to allow banks to use a wider range of assets as collateral to raise cash from the ECB or national central banks. Here, we explain what this means.

Q: What happened?

A: Following the European Central Bank’s quarter point cut in its key policy rate to 1%, its president, Mario Draghi, announced a series of so-called “nonstandard” measures to kick-start credit creation in the euro-zone. These include two long term refinancing operations running 36 months, with an option of repayment a year later.

The ECB also reduced the minimum threshold for some asset-backed securities to a single A credit rating from triple-A The individual national central banks within the euro-zone will be allowed to take bank loans as collateral.

Decisions to relax collateral requirements were expected as, broadly speaking, was the decision to offer longer refinancing operations. But Mr Draghi also pulled a rabbit out of the ECB’s hat, cutting the reserve ratios required of banks by half to 1% from next month.

Q: So?….

A: In effect, the ECB is trying to turn the liquidity fire hose up so that some money manages to trickle through the euro-zone’s banking blockage and into the real economy.

More