Euro central banks can lend out more bonds to aid repo market, ECB's Constancio says

FRANKFURT: Euro zone central banks can lend out more of the bonds they have bought as part of the European Central Bank's stimulus programme to support the market for short-term funding, Euroepan Central Banl Vice President Vitor Constancio told Reuters on Thursday.

The ECB's purchases of more than a trillion euros ($1.06 trillion) of euro zone government bonds has made it hard for investment funds to source such high-quality collateral to use for borrowing in so called repurchase-agreements, or repos.

Constancio's comments confirm that the ECB is keen to avoid the freezing of the 5.5 trillion euros repo market as exclusively reported by Reuters on Wednesday. The repo market is key for transmitting ECB stimulus to the economy and is used by investment funds to finance trading.

"All national central banks...should also offer securities lending to help the liquidity in the repo markets and so we hope and we provide our guidance (for that)," Constancio said.

"I think all of them can do a bit more in the securities lending activity that then supports the repo market." A freeze in repo activity risks undoing some of the ECB's stimulus by hampering lending between financial companies and leaving bond markets vulnerable to sharp selloffs.

Sources have told Reuters the ECB is looking for ways to lend out more of its bonds and the issue would be discussed at the ECB's Dec. 8 meeting, when rate setters will also decide on whether to continue purchases beyond March.

Possible changes include reducing charges for firms which fail to return on time the bonds they have borrowed, accepting new types of collateral and extending the duration of loans. Any decision on bond lending might not be finalised in December and will depend on what other changes the ECB makes to its asset-purchase programme.