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The European Central Bank (ECB) has increased the limit for securities lending against cash collateral by Eurosystem central banks from €150 billion to €250 billion, following a decision yesterday by the ECB Governing Council.
According to ECB Executive Board member Isabel Schnabel, this easing of the Eurosystem’s securities lending limit is a precautionary measure designed to reduce collateral scarcity and to ease market scarcity around the year-end.
Securities that Eurosystem central banks have purchased through their asset purchase programmes (APPs) can be lent out against cash or non-cash collateral. The ECB notes that lending against non-cash collateral dictates that repo transactions are accompanied by offsetting reverse repo transactions for the same value date and usually with the same counterparty.
For securities lending transactions conducted against cash collateral, these offsetting transactions are not required, but total lending by Eurosystem central banks against cash collateral is subject to an overall limit, which was raised to €250 billion on 10 November to guard against HQLA scarcity around the year-end.
Eurosystem central banks have been making securities purchased under the public sector purchase programme (PSPP) available for securities lending since April 2015.
In doing so, the Eurosystem aims to reduce potential for collateral scarcity caused by having large volumes of high-quality liquid securities — used to access central bank liquidity through the APP — sitting on central bank balance sheets.
From 8 December 2016, these central banks have accepted cash collateral in their PSPP securities lending facility without needing to reinvest this through cash-neutral mechanisms.
