Macquarie Bank claims it didn’t try to “game the European Central Bank” as Crikey stated in stories published earlier this week.

In Monday’s item “How Macquarie turned the ECB into a $700m Irish joke” we wrongly said that Macquarie Group had secured a loan from the European Central Bank (ECB) through a euro-area affiliate. Macquarie had secured approval that a security issued by it would be accepted as collateral by the ECB. But Macquarie has not received any funding directly from the ECB, nor can it “take part in the ECB’s money-market operations,” Macquarie said.

Not receiving any ”funding directly from the ECB” might be a bit of Macquarie hair splitting, but it is being ignored in Europe where it matters — at the ECB.

This is what the Financial Times is reporting this morning after the ECB tightened up on rules on what sort of securities could be used to get liquidity loans from the central bank.

Bank stocks in Europe and the UK fell sharply and the risk of owning their debt leapt on Thursday after the European Central Bank declared a crackdown on abuses of its bank liquidity operations.

Jean-Claude Trichet, ECB president, used his regular interest rate conference to announce rule changes more radical than had been expected. These will affect financial firms that have developed too great a dependence on cheap funding from the bank.

Mr Trichet announced a series of measures to increase the cost of using asset-backed securities to obtain ECB funds and to exclude some such deals when underlying mortgages or other loans are not denominated in euros. The announcement follows comments by ECB council member Yves Mersch last month. He said there were still cases where “you see dangers of gaming the system”.

This year it emerged Macquarie Bank had constructed a deal backed by Australian car loans that could be used at the ECB and Lehman Brothers had formed a huge collateralised loan obligation of risky buy-out debt to use at the central bank.

Mr Trichet said the “general character” of its broad-based operations remained unaffected. “We’re not changing it, we’re refining it,” he said.

Only a “small fraction” of collateral would be affected. Banks’ ability to take part in its financing operations would be unimpaired, the ECB president said.

Analysts said the changes would affect banks sharply. “[It is] a further squeeze on banks, increasing the pressure on them to do more expensive longer-term funding … when there is already investor concern about … their existing refinancing needs,” said Matt King, credit strategist at Citigroup.

What Macquarie was doing was to try to pioneer the issuing of Australian asset-backed securities into Europe and the ECB, but that has now been changed. European banks can use non-Australian securities here, or securities issued by banks or other acceptable institutions outside the Group of 10 leading countries, but that has now been ruled out in the ECB.

So no cunning use of an “Irish affiliate” to legitimise an Australian asset back security and turn it into something acceptable to the ECB. Financial sleight of bond is now out of order.

There’s a feeling that Macquarie was perhaps a bit too cute because it exposed the quiet little rort that Spanish banks in particular were using to “game” the ECB and raise money each day to keep liquidity levels high.

Until Macquarie (and to a lesser extent Lehmann Bros and Nationwide Building Society of Britain) came along and tried similar deals, the ECB was turning a blind eye to the use of less than satisfactory securities by some Spanish banks (and some German, Greek and Austrian ones for that matter).

Now the rules have been changed and British banks in particular lost a lot of ground overnight after the ECB changed the rules (so is that a sign that they were also in on the rort?)

HBOS lost around 7% on the day in London, Barclays 6% and Lloyds TSB down 5.7%. Big falls were reported by the troubled UBS of Switzerland and by smaller banks in Australia and Spain.

There have been growing suspicions that eurozone banks were using riskier assets to get money from the ECB (including dodgy quality home mortgages, according to anecdotal reports). But then Macquarie, followed by Lehman Bros, came along and effectively it all blew up when jealous rival bankers leaked the details to European media outlets last month.

The changes take effect from February 1 next year and will see increases in the average “haircuts” applied to asset-backed securities. (A haircut is the amount deducted from the market value of a product when judging its value as collateral. In future, a blanket 12% haircut will apply, replacing a previous sliding scale of between 2% and 18%. Penalty rates will be applied to asset-backed securities valued using models and for unsecured bank bonds.)

As here in Australia, banks will not be able to use assets they have sold, generated or created. It will have to be someone other institutions assets. Assets where banks have offered currency hedges or liquidity support (such as forms of CDOs and bonds involving swaps) will also be barred.

potatos

Peter Fray

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