Banks reel as ECB redraws funding rules

Bank stocks in Europe and the UK fell sharply and the risk of owning their debt leapt on Thursday after the European Central Bank declared a crackdown on abuses of its bank liquidity operations.

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This year it emerged Macquarie Bank had constructed a deal backed by Australian car loans that could be used at the ECB and Lehman Brothers had formed a huge collateralised loan obligation of risky buy-out debt to use at the central bank.

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Only a “small fraction” of collateral would be affected. Banks’ ability to take part in its financing operations would be unimpaired, the ECB president said.

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Analysts at Barclays Capital said the extra haircuts would mean banks might have to post an additional €25bn-€45bn of securities for collateral purposes. “That could cost €375m to €450m annually to banks ... Not in­significant, but probably bearable,” said Laurent Fransolet, analyst at Barcap.