Banque de France Bulletin no. 241: Article 2 How did the Eurosystem’s collateral strategy adapt to the Covid-19 crisis?

By Brueckner Béatrice, Lez Pauline, Nguyen Benoît

Thematic: Politique monétaire et inflation

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A central bank’s collateral policy consists in defining the eligibility criteria of the assets that banks pledge as collateral for their credit operations. Holding sufficient eligible collateral is therefore essential for the banking sector to ensure its refinancing. In response to the Covid-19 crisis, the Eurosystem temporarily eased its collateral rules to facilitate access to its targeted refinancing operations. These measures will be phased out from summer 2022. Overall, these measures have not led to a significant deterioration in the quality of assets pledged at the central bank. By matching data on the banking sector’s securities and loan portfolios with Eurosystem collateral data, it is possible to estimate that the banking sector has, overall, room for manoeuvre in terms of available collateral, and to study the factors underlying the decision by banks to pledge collateral with the central bank.

1 Banks hold around 20% of Eurosystem eligible securities

What is the universe of eligible collateral?

In order to participate in the Eurosystem’s refinancing operations, euro area banks must pledge collateral in the form of securities – in particular sovereign bonds, bank and corporate bonds and covered bonds – or credit claims, i.e. loans to households and companies. The Eurosystem defines eligibility criteria, regarding issuers, asset classes and credit risk (Bindseil, Corsi, Sahel and Visser, 2017).

The universe of eligible marketable assets for the Eurosystem’s refinancing operations amounted to around EUR 16,000 billion in the first quarter of 2021, compared with EUR 15,000 billion in the fourth quarter of 2019. This increase of around EUR 1,000 billion mainly reflects the rise in debt issuance since the start of the Covid-19 pandemic. The eligible universe is made up of sovereign bonds (65%), bank and corporate bonds (21%) and covered bonds (15%). This amount depends on the outstanding amount, the valuation of the securities, but also on the eligibility rules: some securities may become ineligible following downgrades of their credit quality. The eligibility rules themselves vary according to the Eurosystem’s decisions: for example, they were eased during the pandemic (see Box 1).

Euro area banks hold only a small share of this eligible universe, which raises the question of the availability of collateral in sufficient quantity on bank balance sheets, particularly in the context of a crisis when it comes to dealing with liquidity shocks and accessing central bank refinancing. Thus, during the Covid-19 crisis, the demand for refinancing increased sharply, with the outstanding amount of targeted longer-term refinancing operations (TLTROs) jumping from EUR 627 billion in the fourth quarter of 2019 to around EUR 2,100 billion in the first quarter of 2021.

The holding of eligible securities by euro area banks

Did this sharp increase in refinancing go hand in hand with pressure on collateral availability? As regards eligible securities, by matching securities holdings statistics by sector (SHSS) with the Eurosystem’s eligible assets database (EADB), it is possible to assess the portfolio of eligible securities held by banks. In the first quarter of 2021, the euro area banking sector held around EUR 3,500 billion worth of eligible securities in nominal terms, which accounted for the bulk of their debt securities portfolio (see Chart 1). …