The European Central Bank has tightened treatment of retained covered bonds in its collateral framework in changes announced at 1500 CET that were mainly aimed at boosting ABS, although reduced haircuts applicable to many covered bonds offset the move.

In a statement released at 1500 CET today (Thursday), the ECB said that the moves were part of its regular adjustments to its collateral eligibility rules. Some measures would improve consistency, while others would expand the list of collateral, it said, adding that taken together, the measures have an overall neutral effect on the amount of collateral available.

Regarding covered bonds specifically, the ECB said it would “adjust the risk control measures for retained covered bonds to take into account the additional risk which results from the use of such securities by the issuer itself and to ensure a level playing field between securities with comparable risks”.

Whereas most covered bonds face a valuation markdown of 5%, retained covered bonds face a valuation markdown of 8% if credit quality steps 1 and 2 and 12% if step 3.

A covered bond analyst said that this comes after a general shift away from retained bonds by the ECB.

“Step by step over the last nine months or so they have implemented measures to reduce the amount of retained bonds they get,” he said.

Haircuts applicable to many covered bonds were nevertheless lowered by the ECB. For example, fixed coupon AAA to A- bonds with a residual maturity of three to five years in Category II had their haircuts lowered from 3.5 to 2.5 and in Category III from 5.0 to 3.0.

In the lower rating category, the haircut for fixed coupon bonds rated BBB+ to BBB- with a residual maturity of three to five years in Category II stayed the same, at 15.5, but it was reduced from 18 to 16 for bonds with a residual maturity of five to seven years. In Category III fixed coupon bonds rated BBB+ to BBB- had haircuts lowered from 25.5 to 22.5 in the three to five year residual maturity range, and from 28 to 26 in case of a residual maturity of five to seven years. [Corrects and expands original information about bonds in the triple-B range.]

The ECB at the same time eased requirements for ABS, citing in relation to certain changes “their improved transparency and standardisation”.

German newspaper Die Welt had reported this morning that the moves were approved at an ECB meeting yesterday, saying that the central bank’s goal was to improve treatment of ABS, and that covered bond treatment would be tightened to counter-balance this.

ECB officials such as executive board member Benoît Coeuré had indicated in recent speeches a willingness to take moves aimed at creating what ABS proponents have argued should be a more level playing field, particularly in relation to covered bonds. This has come at the same time as the ECB has called for initiatives to help the ABS industry support the European SME segment.

It said today: “Besides the adjustments to the risk control framework, the ECB will continue to investigate how to catalyse recent initiatives by European institutions to improve funding conditions for Small and Medium-sized Enterprises (SMEs), in particular as regards the possible acceptance of SME linked ABS guaranteed mezzanine tranches as Eurosystem collateral in line with established guarantee policies.”