FAQs on the integration of portfolios of credit claims granted to non-financial corporations into the general collateral framework

Q1 Why have you integrated portfolios of credit claims granted to non-financial corporations into the general collateral framework?

With this decision, the ECB is returning to a single list of eligible collateral that establishes a level playing field for all counterparties in the Eurosystem while safeguarding the risk tolerance of the Eurosystem general collateral framework. The decision draws on the positive experience with such non-financial corporation (NFC) portfolios under the temporary additional credit claim (ACC) framework, which has only been accessible for counterparties in some countries.

Additionally, the measure is aligned with the goal of keeping a broad collateral framework for the Eurosystem refinancing operations, in line with the conclusions from our 2024 operational framework review. The measure also supports operational readiness by allowing additional collateral to be mobilised by counterparties with the Eurosystem when needed, as the main refinancing operations (MROs) continue to play a central role in meeting banks’ liquidity needs through fixed rate tenders with full allotment against a broad set of collateral.

Q2 What kind of credit claims can be included in the NFC credit claim portfolios?

For a credit claim to be included in NFC credit claim portfolios, it needs to fulfil the same eligibility criteria as those applied for NFC credit claims to be mobilised as collateral on an individual basis in the general collateral framework. There is one exception to this: the credit quality threshold for credit claims included in NFC portfolios is credit quality step (CQS) 5 on the Eurosystem’s harmonised rating scale, while for credit claims mobilised individually the applicable minimum credit quality requirement remains CQS 3. The credit claims composing a portfolio must also satisfy a concentration limit at debtor/guarantor level (see question 4).

Q3 Why are only portfolios comprising NFC credit claims and not other types of credit claims, such as public sector credit claims, eligible as collateral?

The Eurosystem accepts credit claims granted to NFCs and public sector entities in its general collateral framework. Historically, NFCs in Europe, especially small and medium-sized enterprises, obtain funding in the form of credit claims granted by banks and not via capital markets. Credit claims granted to NFCs consequently represent an important part of the balance sheets of euro area banks. In addition, it is not easy for banks to fund these assets by issuing covered bonds or asset-backed securities. This means that, by allowing counterparties to directly mobilise a broader range of those credit claims as collateral, the Eurosystem is indirectly contributing to the funding of the real economy. By contrast, credit claims granted to the public sector can be more easily funded by banks issuing market instruments such as covered bonds. This makes the business case for accepting portfolios of such credit claims as Eurosystem collateral weaker. The experience with portfolios of public sector credit claims in the temporary frameworks has shown limited usage by banks, which further lessens the business case for adding them to the general collateral framework.

Q4 What is the risk control framework applied to portfolios of NFC credit claims, and how does it differ from the rules applied to NFC credit claims mobilised individually?

The risk control framework for portfolios of NFC credit claims features two specific elements.

First, portfolios need to be granular. The granularity will be ensured by applying a Herfindahl-Hirschman Index (HHI) concentration limit of ≤2%. The HHI will be calculated as the sum of the squared portfolio shares of individual debtors/guarantors, depending on which credit assessment is used for eligibility and haircut purposes under the Eurosystem credit assessment framework (ECAF) rules.

Second, an individual haircut will be applied to each credit claim included in the portfolios. The haircut applied will be the same as that applied in the general collateral framework for individual credit claims. Haircuts for credit claims with a credit quality of CQS 4-5 will be higher to recognise the increased risk of these credit claims and will be published closer to the implementation date (see question 8).

In addition to the two elements above, the Eurosystem reserves the right to introduce at any point a requirement for a minimum share of CQS 1-3-rated credit claims in the portfolios. Initially, the Eurosystem will not apply this requirement (i.e. minimum share of 0%), but it may reassess this, e.g. once it has gained experience with the new framework.

Q5 Why do you apply different credit quality thresholds for NFC credit claims included in portfolios and for NFC credit claims mobilised individually?

Requiring a certain minimum diversification in the form of a concentration limit allows the ECB to accept loans with a lower credit quality requirement of up to CQS 5 in these portfolios. Two considerations have played a role in the design of the eligibility criteria and risk control framework for the portfolios. First, the credit risk of a well-diversified portfolio of up to CQS 5-rated credit claims is aligned with that of an individual CQS 3-rated credit claim. Second, the risk control framework design aligns residual risks for the Eurosystem after haircuts have been applied to the portfolios with the residual risks of individual credit claims. Combining both perspectives means that such portfolios have a risk profile consistent with the general collateral framework.

Q6 How will portfolios of NFC credit claims be mobilised and handled?

Eurosystem counterparties will need to follow the same procedures as currently applied when credit claims are mobilised on an individual level. In particular, counterparties will need to report information on each individual credit claim included in NFC portfolios to the Eurosystem Collateral Management System (ECMS) or to the local collateral management systems of the euro area national central banks. Counterparties will decide whether they want to mobilise NFC credit claims as part of a portfolio or as individual credit claims. They will also be responsible for monitoring the eligibility of their loan portfolios in the ECMS and changing the portfolio composition if needed.

Q7 How will the collateral value of the NFC credit claim portfolios be calculated?

The collateral value of each NFC credit claim portfolio will be calculated as the sum of the collateral values of the individual eligible credit claims included in the portfolio. The collateral value of individual credit claims is obtained by applying haircuts to the nominal outstanding amount of each credit claim.

Q8 When will NFC credit claim portfolios be definitively implemented in the Eurosystem general collateral framework?

Based on ongoing investigations into implementation and IT requirements, the earliest possible implementation date is November 2027. That said, this date is still tentative given the ongoing technical work. The ECB will update these FAQs once the implementation date has been confirmed. Counterparties will be given time to prepare for the implementation of the new rules.