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ECB Eases Rates and Rules to Bolster Banks

by Marlene Y. Satter

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The European Central Bank (ECB) announced Wednesday that it will lend banks as much money as they need for three years, in addition to loosening collateral rules and lowering banks’ reserve ratio requirements (RRR).

The announcement from ECB President Mario Draghi came as the bank also dropped its key interest rate to 1%.Bloomberg reported that the rate cut, at a quarter percent, was the second in two months, and matched a record low.

ECB officials may also loosen collateral criteria so that banks can gain easier access to cheap cash, and lengthen the terms of loans, according to three unnamed euro-area officials who were familiar with the discussions.

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Draghi said that the ECB cut banks’ RRR to 1% from 2%, and will stop fine-tuning operations at the end of each reserve maintenance period. He added that the 36-month loans will be carried out as a fixed rate with full allotment.

Christoph Rieger, head of fixed income strategy at Commerzbank AG in Frankfurt, was quoted in the report saying, “They have listened to the banks and will start some measures to alleviate some of the strains in markets.” He added, “They will also keep open the option to go below 1% on rates; that’s no longer the magic floor.”

However, rather than increasing its government bond purchases, the ECB is turning its attention to getting banks to lend. Its insistence on governments acting to restore investor confidence has been at least somewhat successful, with yields on Italian and Spanish bonds falling after an agreement between France and Germany to move the euro zone closer to a fiscal union.