In December and February, the ECB provided banks with three-year loans totalling €1000 billion. During this operation, the collateral requirements were relaxed, increasing the risk exposure.

Collateral

Until recently, central banks only accepted market-traded collateral, such as government bonds and corporate bonds. ‘It turned out that a significant portion of the banks we wanted to help could not participate in the LTRO (three-year ECB loans, ed.) Their collateral was not good enough,’ Knot explained. He emphasised that he agreed with the support in principle.

This situation primarily affected banks in Southern Europe, which lend substantial amounts to small and medium-sized enterprises (SMEs). To accommodate these banks, central banks would also accept bundled SME loans, Knot explained.

‘Those loans had to meet the same quality standards as other collateral,’ the DNB president noted. Under pressure from seven central banks, the collateral requirement was further lowered, allowing individual SME loans to be accepted as collateral.

Plasterk: ‘Stupid’

PvdA Member of Parliament Ronald Plasterk criticised Knot for exposing the ECB’s internal divisions in this manner, as he expressed on Twitter.

‘What purpose does Knot serve by showcasing that the ECB is internally divided?’ Plasterk questioned. ‘If you are going to inject money, don’t suggest that you might change your mind next month. #stupid’

Risks

The question arises whether the risks borne by these seven central banks might eventually fall on the eurosystem if problems arise in one of these countries. If this happens, will the reduction in the collateral requirement exacerbate the current euro crisis? And perhaps more importantly, should the ECB be open and transparent about this, or should it present a united front to project stability?