Central Banking 101: the EONIA heartbeat | 178 comments (178 topical, editorial, 0 hidden)

Re: Central Banking 101: the EONIA heartbeat (none / 1)

In order to be eligible as collateral for Eurosystem credit operations, marketable assets must comply with the eligibility criteria. Schematic overview
Eligibility criteria Marketable assets
Type of asset ECB debt certificates

Other marketable debt instruments: e.g.
Central government debt instruments
Debt instruments issued by central banks
Local and regional government debt instruments
Supranational debt instruments
Covered bank bonds
Credit institutions debt instruments
Debt instruments issued by corporate and other issuers
Asset-backed securities
Credit standards The asset must meet high credit standards. The high credit standards are assessed using Eurosystem credit assessment framework (ECAF) rules for marketable assets.
Place of issue EEA
Settlement /
handling procedures Place of settlement: euro area
Instruments must be centrally deposited in book-entry form with central banks or an SSS fulfilling the ECB's minimum standards.
Type of issuer / debtor / guarantors Central banks
Public sector
Private sector
International and supranational institutions
Place of establishment of the issuer / guarantor Issuer: EEA or non-EEA G10 countries
Guarantor: EEA
Acceptable markets Regulated markets
Non-regulated markets accepted by the ECB
Currency Euro
Cross-border use Yes
For details, see the latest version of
General Documentation, Section 6.2.1, 1.1MB, en

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Tue Mar 1st, 2011 at 10:21:51 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)

I will let you tell me just how fine are the ABSs and the assets that cover the covered bank bonds. But I am very sure that all applicable regulations were met to the letter, if not the spirit.

The asset must meet high credit standards. The high credit standards are assessed using Eurosystem credit assessment framework (ECAF) rules for marketable assets.

And I will bet that the Irish banks met these standards right up until they didn't. Are those standards similar to those required of the banks during the stress tests?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 1st, 2011 at 08:52:07 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

The more I think about this the more angry I am about this:

The idea that sovereign bond purchases need to be "sterilised" to prevent inflation illustrates that the ECB has a very peculiar concept of sovereign debt, in contrast to its idea of private debt. Consider the ECB's own covered bond ("Pfandbrief") programme. In May 2009, the ECB decided to buy up to €60bn of asset-backed bonds issued by Eurozone commercial banks, without much protest. A year later the mere suggestion that the ECB might purchase a comparable amount of sovereign debt was, and continues to be, met with hysteria. Some ECB council members went so far as to claim that secondary market purchases of sovereign bonds were prohibited by the Treaty - which is not true. The constituent rules of the eurozone appear to be based on the bizarre idea that sovereign debt is toxic until such time as it has been sanitized by going through the bid-offer spread of a major investment bank, while privately-issued covered bonds are pristine, even at issue.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Wed Mar 2nd, 2011 at 02:12:29 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)

"Consistency is the hobgoblin of small minds!" --- especially on a matter as important as money.

Perhaps the problem is the name -- European Central Bank. People fail to understand two crucial factors:

The center is Germany.
It is not a "common" bank, as in "acting in the common interest of all citizens of Euro-zone nations. It is an elite bank, as in "acting in the interests of the monetary elite, primarily German.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 2nd, 2011 at 09:21:03 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

PIMCO - Covered Bond Basics

Covered bonds are similar in many ways to mortgage- and asset-backed securities with one major difference: the loans backing a covered bond remain on the balance sheet of the issuing bank. The bonds are therefore obligations of the issuing bank, and the issuer retains control over the assets. It can change the make-up of the loan pool to maintain its credit quality, which can benefit investors, and it can also change the terms of the loans. By contrast, mortgage- and asset-backed securities are typically off-balance-sheet transactions in which lenders sell loans to special purpose vehicles that issue bonds, thus removing the loans--and the risk associated with those loans--from the lenders' balance sheets.

Germany introduced covered bonds, known as Pfandbriefe, in 1770 to finance public works projects. Since then, 24 other countries in Europe have adopted the covered bond structure, each with its own unique laws. In Spain, for example, covered bonds backed by mortgages, known as Cédulas Hipotecarias, were created by a special law in 1981, while in France, covered bonds, known as obligations foncières, can be traced as far back as 1852, with the establishment of the first mortgage bank, Credit Foncier de France. All countries with covered bond laws now allow for bonds backed by mortgages, while only a few allow covered bonds backed by public sector loans: Germany, France, Austria and Spain. In Denmark and Germany, covered bonds may also be secured by ship loans.

Originally, only specialised mortgage and public sector banks could issue covered bonds in Germany, but new laws in 2005 expanded the universe of potential issuers to include all credit institutions that meet certain credit quality requirements and obtain a license. Many other countries have also made the covered bond market accessible to more lenders, but some, including Denmark and France, still require that covered bond issuers limit their business to making high quality loans in specific areas, such as mortgages.

German asset-backed securities = good to purchase in the primary market.

Peripheral sovereign bonds = illegal to purchase in the primary market, toxic to purchase in the secondary market.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Wed Mar 2nd, 2011 at 10:17:24 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

German asset-backed securities meeting "certain credit quality requirements", don't forget.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Mar 2nd, 2011 at 11:02:22 AM EST
[ Parent ]

Covered bonds (none / 1)

have historically been the safest kinds of bonds - because they are backed by both the signature of the issuer AND by valuable assets.

Given that issuers are still fully on the hook, the temptation, as in non-recourse ABSs, to game the system by slowly worsening the quality of the assrts provided as security, is inexistent.

It's a practical way for serious issuers to recycle their long term assets and get some liquidity - but as the debt stays on their balance-sheet, they can't do that beyond certain limits.

As a matter of fact, covered bonds were invented at a time when sovereign or bank defaults were rather frequent, and they were specifically designed to ensure that they could not happen with them.

So there are good reasons to treat covered bonds as high quality collateral.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Mar 6th, 2011 at 05:18:09 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

For more info on Pfandbriefe, go to this page at ECBC, click on Pfandbriefe, then scroll down. Other types of covered bonds can be compared.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Mar 2nd, 2011 at 11:11:44 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

click and hold to enlarge

From the ECBC's Factbook 2010.

Germany goes in for public sector-backed covered bonds more than mortgage-backed. But still has more than twice as much outstanding as Country N°2, Spain.

More to come.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Mar 2nd, 2011 at 11:36:28 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

So the ECB could have bought 60 billion worth of public-debt-backed covered bonds without any complaints or need for sterilization in mid-2009?

But buying public debt requires sterilization and is accompanied by screams of bloody murder.

The sanitizing effect of investment banks, indeed.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Wed Mar 2nd, 2011 at 11:44:18 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)

The ECBC Factbook linked above has a chapter

1.2 WAS THE ECB COVERED BOND PURCHASE PROGRAMME A SUCCESS?

Opening key fact:

The ECB disclosed daily the purchase volume under its programme. In addition, monthly reports on the purchases were published disclosing the amount purchased in the primary and secondary market. However, the ECB did not disclose any additional information regarding the breakdown by currency or country, not even in the final report. We only know that "in total, 422 different bonds were purchased, 27% in the primary market and the remaining 73% in the secondary market. The Eurosystem mainly purchased covered bonds with maturities of three to seven years, which resulted in an average modified duration of 4.12 for the portfolio, as of June 2010". We also know that the "Eurosystem intends to hold the purchased covered bonds until maturity".

The paper assumes that the €60bn were allotted as per national bank capital holdings in the ECB, which would give the Bundesbank practically a quarter.

The Conclusion states that the programme did a lot for the covered bond market. But:

The only caveat has been the domestic bias of the purchases by the national central banks which based on the flow we saw and other anecdotal evidence bought primarily paper from issuers out of their own countries. Hence, the German, French and Italian issuers benefited isproportionally whilst the Greek, Spanish and Portuguese markets, despite having arguably the highest needs, received less support due to their lower outstanding covered bond volumes.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Mar 2nd, 2011 at 12:08:30 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

So the ECB acted as market maker of last resort for the covered bond market. Why can this not be done for the sovereign bond market without giving the serious people apoplexy?

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Wed Mar 2nd, 2011 at 04:46:08 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (4.00 / 3)

Oh, but it can. All the governments of the relevant countries have to do is found a government-owned and -run bank, and have that bank issue covered bonds against its own sovereign debt. And viola, the purifying power of the bid-ask spread of a - nominally - private bank has turned the toxic public debt into a pristine private monetary instrument.

These rules are a fucking farce.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 2nd, 2011 at 10:05:07 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

JakeS:

These rules are a fucking farce.

Been screaming about this for over a year now. But finally we're amassing a wealth of evidence of the extent to which the Eurozone is built on bullshit.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Thu Mar 3rd, 2011 at 04:43:15 AM EST
[ Parent ]

it's not so simple (none / 0)

It's not turning public debt into something good: it's turning an extra-volume of public debt, plus the signature of the entity issuing the bonds, into something good. Overcollateralisation, plus recourse over someone else's paid-up equity: it does make a difference.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Mar 6th, 2011 at 05:21:02 AM EST
[ Parent ]

Re: it's not so simple (none / 0)

Why is buying public bonds inflationary and in need of sterilization, while buying covered bonds isn't?

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sun Mar 6th, 2011 at 05:26:55 AM EST
[ Parent ]

Re: it's not so simple (none / 1)

If, as with Portugal just now, a country is in a situation where it seems unlikely that it will have the tax base to pay off its obligations, covered bonds might not be such a good solution. Why put public assets such as hydro power, wind power, rail, etc. up as collateral for covered bonds? That would seem a prelude to loss of public control of these assets in a default. It would seem more in the (Portuguese) public interest to leave the debt backed by "the full faith and credit" of the nation and let the debtors come after the whole angry nation. At least the public would retain the benefits of public ownership of power generation, rail, etc.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 6th, 2011 at 09:23:07 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

I wondered who was putting a figure so deep into the comment thread that the post had to be made almost illegibly tiny to get rid of the pan and scan effect.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 2nd, 2011 at 04:05:57 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)