ECB may buy bad loans

The European Central Bank is looking into buying bad loans from southern Europe to relieve the pressure on banks in crisis-stricken countries, the German newspaper Die Welt reported.

The ECB wants to revive asset-backed securities (ABS) which allow banks to pass at least some of the credit risk on to other investors as they try to boost their capital and liquidity buffers to adapt to new regulatory standards – one reason for their reluctance to lend.

In an advance copy of a report due to be published today, Die Welt said the ECB not only wanted to improve the framework for asset-backed securities but, citing central bank sources, said the ECB’s Governing Council was also discussing whether the central bank could itself buy these securities.

The newspaper cited the sources as saying it was quite possible that a majority of those sitting on the ECB council would be in favour of such action, though there were also stern opponents including the Bundesbank and several members of the ECB’s executive board.

Die Welt said an ECB spokesman did not want to comment and pointed to ECB President Mario Draghi’s public statements, according to which the discussions are by no means over yet.

Last week Draghi said: “The Governing Council decided to start consultations with other European institutions on initiatives to promote a functioning market for asset-backed securities,” adding that no decisions had been taken.

The ECB was not immediately available for comment when contacted by Reuters. ( C) Reuters