The ECB is making good on Wellink’s statements

ECB governing council member and Dutch National Bank head Nout Wellink said two weeks ago that the ECB was going to stop lenders abusing ECB’s credit crisis policy of accepting lower credit quality. The ECB is going to make good on Wellink’s promise – but not until Feb 1st. So, get your free money now, while you can.

See the excerpt from an FT story below for more on this development.

The cost to banks of using riskier assets to secure liquidity from the European Central Bank is to rise next year as part of a clampdown on abuse of its financial market liquidity-supporting operations.

Jean-Claude Trichet, ECB president, announced the increased charges after widespread evidence that banks were taking advantage of the ECB’s broad-based collateral system. But he argued that the “general character” of its operations would remain unaffected. “We not changing it, we’re refining it,” he said.

Mr Trichet added that the assets affected accounted for a “small fraction” of the collateral available to banks, whose ability to access ECB liquidity would not be impaired.

The changes, which take effect from February 1, increase the “haircuts” – the amount deducted from the market value of a product when judging its value as collateral – applied to asset-backed securities. There were also additonal penalties announced for using asset backed securities valued using models and for unsecured bank bonds.

Bank stocks, which came under pressure on Wednesday on rumours the ECB was considering restricting the liquidity scheme, fell sharply.

Banque Populaire was down 5.8 per cent in Milan at €12.48 and Banco Santander fell 3.8 per cent to €11.46 in Madrid. French banks Crédit Agricole and Société Générale were down 4.8 per cent and 4.4 per cent respectively at €14.05 and €54.10.

In the UK banks were also heavy fallers on suggestions the scheme may be restricted to euro assets only. HBOS was the heaviest faller on the FTSE 100, down 7 per cent at 281¾, while Barclays fell 6.3 per cent to 328¼p. Lloyds TSB fell more than 5 per cent to 287¼p and Royal Bank of Scotland fell 4 per cent to 227½p.

Source
ECB clamps down on abuse of lending – FT