ECB unveils steps to boost credit to businesses

FRANKFURT, Germany (AP) 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 Thursday 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.

Beyond Thursday's measures, the ECB is also in talks with the European Investment Bank on further steps to encourage a market for asset-backed securities as a source of credit for small and medium sized businesses. One possible measure could be EIB guarantees for the packaged loans, which would raise their credit ratings and enable a broader range of investors to buy them. The EIB is backed by eurozone taxpayers and run by their governments.

The ECB said in its statement Thursday that it would now accept asset-backed securities with A ratings from at least two ratings agencies, instead of requiring two AAA ratings.

The ECB also said it would give out more credit on each eligible asset-backed security that banks use as collateral to get loans. To protect itself from losses, the ECB does not hand out 100 cents of credit for every euro of collateral, but deducts a percentage known as a haircut as insurance. Haircuts can range from tiny slices such as a 0.5 percent haircut on short-term, safe investments to 44 percent when it loans against longer term, less secure securities.

The bank also said it is looking at accepting even lower-rated kinds of asset-backed securities known as mezzanine tranches.

Although such steps in theory increase the ECB's risk of loss, it said it was balancing that by restricting the use of other kinds of asset-backed securities known as covered bonds.