October 5, 2016 / 9:03 AM / 10 months ago

ECB restricts use of unsecured bank bonds as collateral

The headquarters of the European Central Bank (ECB) are pictured in Frankfurt, Germany, September 8, 2016.Ralph Orlowski/File Photo

FRANKFURT (Reuters) - The European Central Bank will continue to accept unsecured bank bonds as collateral for lending, including some that may be written down if a bank fails, but it is restricting their use and increasing checks, it said on Wednesday.

The move comes in response to new European rules stating that investors in a bank, including holders of bonds that are not backed by collateral, must suffer losses in case of default before public money can be used.

The decision ensures that banks' senior unsecured debt subject to "statutory subordination", where national rules say it should be written down before other senior debt in a bail-in, can still be used by banks and investment firms to borrow money from the ECB.

"The ECB has decided to maintain the eligibility of UBBs for the time being, including the eligibility of statutorily subordinated UBBs that are not also contractually subordinated, which under the current rules would have become ineligible as at 1 January 2017," it said in a statement.

The central bank will, however, tighten the use of such debt as collateral and increase risk checks before granting eligibility.

"The ECB has decided to reduce, as of 1 January 2017, the usage limit for uncovered bank bonds from 5 percent to 2.5 percent," it added.

The new limit will not apply to assets that are worth less than 50 million euros (44 million pounds) after haircuts are applied, or to assets guaranteed by public sector entities that can levy taxes.

The ECB will review the guidelines next year, noting work is ongoing towards a common EU approach to the matter.

Reporting By Francesco Canepa Editing by Jeremy Gaunt

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