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Securities lending - Q&A

Last updated: 30 October 2020

Q1: As regards PSPP and public sector PEPP securities lending against cash collateral, how is the overall limit set?

When the Eurosystem started to accept cash as collateral in December 2016, the Governing Council decided on a limit of €50 billion, taking into account the expected usage of cash as collateral and its effect on excess liquidity. This limit was increased to €75 billion in March 2018, among other things to reflect the increase in the stock of acquired assets since December 2016.

Q2: How is the limit of €75 billion allocated across the Eurosystem?

The limit is allocated in proportion to the PSPP holdings of the Eurosystem central banks that make use of the possibility to accept cash as collateral, while allowing for some flexibility across jurisdictions if needed.

The following Eurosystem central banks accept cash as collateral in their securities lending: the ECB, the Nationale Bank van België/Banque Nationale de Belgique, the Deutsche Bundesbank, the Central Bank of Ireland, the Banco de España, the Banque de France, the Banca d’Italia, De Nederlandsche Bank, Banka Slovenije and Suomen Pankki – Finlands Bank.

Q3: Why is securities lending of covered bond and asset backed security holdings not mandatory for the Eurosystem?

For cost efficiency and operational reasons, securities lending of covered bond holdings is not mandatory for Eurosystem central banks. The establishment and maintenance of securities lending arrangements has a certain cost for the Eurosystem central banks. The total cost depends on a number of factors, such as the lending channel, the lending infrastructure, the number of securities available for lending, the type of collateral accepted and other technical and operational parameters. The overall Eurosystem cost increases if several central banks make the same security available for lending.

Covered bonds purchased under the APP and PEPP are often held by several (i.e. more than two) Eurosystem central banks, which is due to the programme-specific allocation of the eligible universe to individual Eurosystem central banks. This is in contrast to the sector allocation of public and corporate sector bonds, where each security is held by one or at most two Eurosystem central banks. Moreover, the covered bond allocation often results in individual central banks having relatively small holdings, so that the benefit of setting up and maintaining securities lending facilities would not justify the cost. However, even though lending of covered bond holdings is not mandatory, the ECB and several other national central banks make their covered bond holdings available for lending. Those Eurosystem central banks that do not make their holdings available for lending very rarely receive requests to borrow them. For them, the expected demand would not justify the cost of establishing securities lending facilities. Most importantly, holdings from each covered bond jurisdiction are made available for lending by at least one Eurosystem central bank.

Securities lending of holdings under the ABSPP is in principle possible for the ECB, which holds all the asset backed securities (ABS) purchased under the ABSPP. However, no requests for securities lending have been received since the start of the ABSPP in October 2014. This is reportedly at least partly due to the lower secondary market liquidity of this asset class and the higher share of hold-to-maturity portfolios compared to other markets. In the event of a broader increase in demand for borrowing the ABS held under the ABSPP, the ECB could consider making its holdings available for lending taking due consideration of the cost-benefit implications, including the technical complexity of ABS amortising cash flows.

Q4: Why does the Eurosystem not publish the ISIN lists of its covered bond and asset backed security holdings for securities lending purposes?

The Eurosystem publishes the ISIN lists only for those programmes for which the Governing Council has decided to make securities lending mandatory. Counterparties that wish to borrow covered bond holdings can contact the ECB or any NCB that makes those bonds available for lending to enquire about the potentially availability of their holdings of particular ISINs.