Report: Bundesbank head warns ECB

FRANKFURT, Germany (AP) ? The head of Germany's Bundesbank has warning the European Central Bank about risks involved in the massive euro529.5 billion ($712 billion) credit offering it made to banks Wednesday.

Germany's Frankfurter Allgemeine Zeitung reported Thursday that the head of Germany's central bank, Jens Weidmann, wrote a letter to the ECB warning about the risks of looser rules on collateral for the loans.

The looser rules meant more banks could borrow money ? 800 banks took advantage of the loans this time around, compared with 523 the last time the credit was offered back in December. Weidmann is warning that the practice exposes the ECB and national central banks to more risk.

Neither the Bundesbank nor the ECB had any comment on the letter.

The ECB lent the euro529.5 billion Wednesday with the aim of steadying the region's financial system against the eurozone debt crisis. The operation ? known as a Long-Term Refinancing Operation ? follows a similar offering of euro489 billion to 523 banks on Dec. 21. The three-year ECB loans, given against collateral such as bonds or other securities, cost banks 1 percent.

This time the ECB relaxed its rules to allow a wider circle of assets that could be offered up to central banks as collateral in return for loans. The new rules allowed national central banks to accept corporate loans in return for credit, with the national central bank bearing the loss risk. This was a move aimed at getting smaller banks to join in the credit offering.

The ECB wants to make sure banks have enough funding to do business so that the flow of credit is not restricted in the wider economy. It added that the added risks from less secure collateral are being addressed by lending out far less than the face value of the assets being offered as the collateral. Some euro700 billion in new collateral being offered by the new banks to take part in the credit offering could obtain only about euro200 billion in loans, ECB head Mario Draghi has said.

The mass infusion of credit ? estimated by Commerzbank analysts to be some three times the theoretical normal cash needs of the banking system ? has led to a general easing of market tensions brought on by the debt crisis. Banks have been able to issue bonds, and borrowing costs have fallen for indebted governments as they roll over their debt loads.

But the Bundesbank ? guardian of Germany's conservative approach to monetary policy ? has made increasingly skeptical comments about the program. Weidmann has warned that overly generous liquidity could lead to banks investing in risky assets. He said last week in a speech in Mexico City that "the crisis cannot be solved solely by throwing money at it." Indebted governments needed to tackle the root causes of the crisis by closing budget deficits and by reforming their economies so they grow faster.

Weidmann sits on the 23-member ECB governing council.

Associated Press

Source: http://hosted2.ap.org/APDEFAULT/f70471f764144b2fab526d39972d37b3/Article_2012-03-01-EU-European-Central-Bank/id-6d871772dd484746b8bb673344fd1403

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