(BN) ECB Said to Consider Extra Measures to Stimulate Bank Lending

Disappointing. Yes we will get a 50 bp rate cut tomorrow, but this is NOT what the market was looking for. Also, how does this really help lending to anything other than sovereigns and other banks (if it even does that). Remember way back when we all used to complain about how Japan was creating zombie banks? This is yet another step towards making some nice zombie banks in Europe, but I’m sure “this time will be different”.

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ECB Said to Consider Extra Measures to Stimulate Bank Lending

2011-12-07 13:38:13.163 GMT

(For more on Europe’s debt crisis, see EXT4.)

By Gabi Thesing and Simone Meier

Dec. 7 (Bloomberg) — The European Central Bank may

announce a range of measures tomorrow to stimulate bank lending,

said three euro-area officials with knowledge of policy makers’

deliberations.

Options on the table include loosening collateral criteria

so that institutions have more access to cheap ECB cash and

offering them longer-term loans to grease the flow of credit to

the economy, said the officials, who spoke on condition of

anonymity because the discussions are private. Two said an

interest rate cut is likely, with only the size of the reduction

to be determined for the monthly decision tomorrow.

The ECB is focusing on getting banks lending again rather

than increasing its government bond purchases to fight Europe’s

debt crisis. The central bank’s insistence that governments take

measures to restore investor confidence appears to have paid

dividends, with Italian and Spanish yields plunging after

Germany and France agreed to move the 17-nation euro area toward

a fiscal union.

The ECB has indicated it will act to prevent a credit

shortage as this falls within its monetary policy remit.

President Mario Draghi said on Dec. 1 that the ECB had

“observed serious credit tightening” recently and is “aware

of the continuing difficulties for banks, due to the stress on

sovereign bonds, the tightness of funding markets and scarcity

of eligible collateral in some financial segments.”

Draghi holds a press conference at 2:30 p.m. in Frankfurt

tomorrow, 45 minutes after the ECB’s rate decision is announced.

Collateral Pool

Policy makers may seek to broaden the pool of eligible

collateral for ECB loans by loosening rules governing the use of

asset-backed securities, the officials said. They may also

increase the amount of uncovered bank bonds that can constitute

a lender’s collateral portfolio from the current 10 percent

limit, they said.

The ECB is already lending banks as much money as they want

against eligible collateral for periods of up to a year. It is

likely to add two-year loans to its arsenal, two officials said.

While a three-year loan has been discussed, it is unlikely at

this stage, they said.

One official said longer-term loans might encourage banks

to lend to companies and households, and they would also help

financial institutions meet new Basel rules on holding longer-

term liquidity.

Economic Projections

Tomorrow’s meeting is the ECB’s last scheduled opportunity

to take policy action this year. It will be accompanied by

publication of the central bank’s latest projections, including

a 2013 inflation forecast that may justify further monetary

stimulus.

Draghi said last week that the ECB’s goal is to maintain

price stability “in either direction,” suggesting it would act

as forcefully to prevent a significant undershooting of its 2

percent ceiling as it would to stop an overshooting.

“This applies to both the setting of official interest

rates and the implementation of non-standard measures,” Draghi

said.

One official said the economic outlook has deteriorated

markedly since Draghi said on Nov. 3 that the ECB expected a

“mild recession.”

Policy makers will cut the benchmark rate by a quarter

percentage point to 1 percent, according to 53 of 58 economists

in a Bloomberg News survey. Only two predict a half-point

reduction to 0.75 percent.

For Related News and Information:

Stories on ECB interest rates: STNI ECBACTION

Stories related to the ECB: NI ECB BN <GO>

Euro-region economic stories: TNI ECO EUROP

–With assistance from Jeff Black in Frankfurt. Editors: Matthew

Brockett, Craig Stirling

To contact the reporters on this story:

Gabi Thesing in Frankfurt at +44-20-7673-2153 or

gthesing@bloomberg.net;

Simone Meier in Frankfurt at +41-44-224-4134 or

smeier@bloomberg.net

To contact the editor responsible for this story:

Craig Stirling at +44-20-7673-2841 or

cstirling1@bloomberg.net