Yesterday the ECB announced that it will extend Eurosystem’s ‘collateral for cash’ limit to €250 billion from €150 billion. Isabel Schnabel, German Executive Board Member of the ECB stated in Twitter that this was done as “a precautionary measure to ease collateral scarcity and support market functioning around the year-end”.
Moreover, Dr. Schnabel stated that “Eurosystem central banks (incl. #ECB) make securities purchased under our asset purchase programmes available for securities lending in a decentralised manner, subject to backstop pricing.”
The move of the ECB implies that euro-nominated market liquidity (credit) is drying up, which could lead to catastrophic collapse, that is, fire sales in the capital markets. More precisely, the move quite straight-forwardly implies that some financial institutions, most likely banks but also maybe hedge funds or even pension funds, are running out of high quality collateral and that the ECB is stepping in to provide it, even though with somewhat penalizing (“backstop”) pricing . This, collateral shortage, has been one of the speculated (now confirmed) effects of the quantitative easing (QE).
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