Fitch: ECB Liquidity Extension Offers Banks Support But Structural Issues Remain
11 May 2010 8:39 AM (EDT)
Link to Fitch Ratings' Report: The Role of the ECB - ECB Liquidity Provision
Fitch Ratings-London-11 May 2010: Fitch Ratings says in a special report today that the European Central Bank's (ECB) weekend announcement that it will extend its non-standard liquidity measures is in line with Fitch's expectation that the ECB will continue to support and work to restore market confidence as and when required.
However, Fitch notes that while the ECB's non-standard measures provide a temporary boost to banks' liquidity, they are not intended to be permanent. The agency thus has some concerns that while banks have generally taken advantage of the measures to implement more rigorous liquidity management procedures, a number of banks were either unwilling or unable to do so.
The additional liquidity provided by the ECB through the global financial crisis since August 2007 was further boosted in May 2010, in the wake of renewed market volatility, particularly with respect to Greece's public finances and the potential knock-on impact with respect to other southern European countries.
The newly announced non-standard liquidity measures include the re-activation of USD liquidity swap facilities, additional fixed rate tender procedures for three-month longer-term refinancing operations (LTROs), a new six-month LTRO and a new "Securities Markets Programme" intended to restore liquidity in the debt markets. These measures follow the suspension, on 3 May 2010, of the application of minimum credit ratings in the collateral eligibility requirement for all securities issued or guaranteed by the Greek government.
With respect to the geographical distribution of banks using ECB facilities, Fitch has found that banks in Greece, Ireland and, to a more limited extent, Spain and the Netherlands, have been more extensive users of ECB liquidity than in previous years. This could indicate that banks in these systems are increasing their reliance on these sources for structural funding needs or as a boost to flagging profitability. Conversely, banks in Italy and France have reduced their usage compared with pre-crisis levels.
In Germany and Belgium, banks have also reduced their use of ECB refinancing operations as a proportion of the total, but they continue to be heavy users overall compared with other countries. A number of banks in Germany and Belgium that were heavy users of ECB funding in the past are undergoing restructuring, involving significant shrinking of their balance sheets and asset sales.
Overall, the availability and usage of the ECB liquidity facilities by banks throughout the euro zone has been a credit positive in sustaining banks' Long- and Short-term IDRs. Had these facilities not been available, a greater number of banks would have failed or seen greater downgrades in their IDRs. Nonetheless, banks with particularly weak franchises are likely to experience further IDR and Individual Rating downgrade pressure, as such institutions may suffer a drop in profitability once ECB facilities return to normal. Fitch thus notes that further rating downgrades may occur.
Last summer the ECB successfully stabilised funding costs in the covered bond market by underpinning investor confidence. The ECB achieved this through its covered bond purchase programme which was launched in July 2009. However, the effectiveness of the programme in channelling funds to the real economy is harder to ascertain, as banks have tended to hoard liquidity.
Liquidity pressures also remain in the structured finance markets, as banks bridged the funding and liquidity gap created by the closure of the SF markets in 2007 by increased use of SF securities as eligible collateral for shorter-term repo funding with the ECB. Given the desire to manage the credit quality of SF collateral delivered to it, the ECB has gradually introduced tighter eligibility criteria for SF collateral. Fitch believes that the ECB's SF collateral is unlikely to grow significantly as a source of liquidity beyond the collateral already within the system, as a result of more limited eligibility and the degree of SF collateral that has already been structured and retained for this purpose.
The full report, entitled "The Role of the ECB, - Temporary Prop or Structural Underpinning?" is available from Fitch's website at
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