* Year-end drought worries policy makers
* Chart on collateral squeeze since QE:
By Francesco Canepa
FRANKFURT, Feb 16 The European Central Bank is
ready to make new changes to the way it lends bonds for
collateral after a drought of such paper at the turn of the year
threatened the functioning of financial markets, minutes of the
ECB's latest meeting showed on Thursday.
The worst scarcity of German and French bonds on record just
before New Year saw investors pay record rates to borrow that
paper, used as collateral for guaranteeing trading positions,
and avoid the risk of being put into default.
The ECB and the other euro zone's central banks are lending
out part the 1.3 trillion euros ($1.38 trillion) of government
debt they have bought since 2015. Since December, some of them
have been accepting cash as collateral against some of that
But their efforts have proven insufficient, particularly at
the end of the year, when the market normally dries up because
banks are reluctant to take on risk before reporting results.
"Against this background, the Governing Council should
carefully monitor market developments and the use of the
securities lending facilities, and stand ready to make further
adaptations, if needed," the ECB said in the minutes of its Jan
Aggressive ECB bond buying, higher collateral requirements
and stricter rules on bank dealing have all contributed to a
squeeze in the availability of government bonds.
With the end of the first quarter just over a month away,
industry group the International Capital Market Association
(ICMA) urged the ECB to make new changes earlier this week.
These include centralising all bond lending, currently
largely left to national central banks, at the ECB, which
already has agreements in place with dealers across the bloc,
thereby removing a hurdle for borrowers.
The ECB had just 5 billion euros worth of bonds out on loan
against cash at the height of the bond drought on Dec. 31, its
annual accounts showed on Thursday.
This compares to 112 billion euros worth of government bonds
bought directly by Frankfurt since the start of the programme in
($1 = 0.9399 euros)
(Editing by Jeremy Gaunt)