October 01, 2014

Why would ABS “junk loan bundles” be safer on ECB’s balance sheet than on the banks’?

Sir, Claire Jones and Sam Fleming report that “Draghi in push for ECB toaccept Greek and Cypriot ‘junk’ loan bundles” October 1.

And my question is… would these “junk loan bundles” be safer on ECB’s balance sheet than they are on the banks’? Because, if not, why not ask the Basel Committee to reduce the capital banks are required to hold against these “junk loan bundles” to what regulators allowed banks to hold against these assets when they placed it on the books, back at those good old days no one treated those assets pejoratively as “junk loan bundles”.

I guess the Basel Committee should be open to that plea by the ECB, since it was the Basel Committee which painted the whole banking system in the corner of too high exposures against was previously, ex ante, perceived as “absolutely safe” holding too little capital.

And even if these “junk loan bundles” might end up in something related to ECB… if you could solve it in other ways, meaning allowing banks to use the liquidity they have but that they cannot use because of lack of capital, what’s the rush of getting that “junk” there?