ECB unveils new rules to boost credit to businesses

FRANKFURT - The Associated Press

The ECB launches new rules to ease lending to banks. AFP photo

The European Central Bank is easing its lending rules to encourage banks to provide more credit to companies and help Europe’s stagnant economy recover.

Lack of credit is a major factor holding back the economies of eurozone countries such as Spain and Italy. The ECB has set its interest rate benchmark at a record low of 0.5 percent - but shaky banks are not passing those low rates on to companies and households.

One way around that is if banks can have loans packaged into securities - called asset-backed securities- and sell them. That would free up money for more loans and raise cash from investors who wouldn’t normally loan directly to companies.

For instance, an insurance company or investment fund that would not normally loan to individual small companies could still buy asset-backed securities if they carry a strong credit rating. That expands the pool of money available.

The ECB said on July 18 that it would now accept lower-rated asset-backed securities as collateral for the loans it gives to banks. The ECB’s move will encourage banks to create more such securities, since they could use them to get credit themselves from the central bank at its regular offerings.

The bank made the move, even though it has long stressed that other European Union institutions, such as governments, have a major role to play in further loosening credit in the parts of the eurozone hardest hit by the currency union’s financial crisis.