The European Central Bank’s Governing Council has changed how the Eurosystem uses external credit assessment institution (ECAI) ratings to assess private sector assets pledged as collateral, shifting from a first-best to a second-best rating rule for determining eligibility and applicable haircuts. The first-best rating approach will continue to apply to assets issued or guaranteed by the euro area public sector, while the move to second-best ratings also extends to accepted non-euro area public sector assets. The change covers private sector instruments including unsecured bank bonds, covered bank bonds and assets issued by non-financial corporations. Where multiple ECAI ratings exist, collateral credit quality will be based on the second-best rating; where only one accepted ECAI rating is available, a one-notch downgrade will be applied to derive the rating used for collateral purposes. The ECB also reiterated that it may deviate from credit rating agencies’ ratings where warranted, in line with its monetary policy discretion. Implementation will occur no earlier than 18 months after the announcement, with the ECB to publish the start date and technical details well in advance once Eurosystem IT changes are in place.
European Central Bank 2025-02-21
European Central Bank to apply second-best ECAI rating to private sector collateral under the Eurosystem framework
The European Central Bank's Governing Council has revised the use of external credit assessment institution ratings for private sector collateral, adopting a second-best rating rule instead of the first-best. This change affects private sector instruments like unsecured and covered bank bonds, with a one-notch downgrade if only one rating is available. The ECB retains discretion to deviate from credit ratings as necessary, with implementation set for no earlier than 18 months post-announcement.