ECB Tightens the Rules- What About Covered Bonds? 
Monday, September 8, 2008, 09:36 AM
Posted by Richard Senior
The ECB announced last week a significant increase in haircuts for ABS used as repo collateral to 12% from a minimum 2%. In addition, there is a further 5% haircut (5% of 88% being 4.4%) on ABS created and kept on balance sheet, making a total of 16.4% in such cases.

The amendments were clearly designed to bring the scheme back to its intended purpose, and exclude the likes of Macquarie's Australian car loan deal which some viewed as being exclusively designed to "game the system".

What are the lessons from this?
-Even with a haircut of 16.4%, 83.6% of cheap money is still available;
-Covered bonds attract a much lower haircut, but are still eligible as repo collateral with the ECB

I shall have more to say on the attractions of covered bonds on another occasion.

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