The European Central Bank (ECB) said in a statement that it plans to tighten its rating requirements for banks using ABS as security in its lending operations.

Starting March 1, 2010, to be eligible for collateral, new ABSs will require at least two ratings from an accepted external credit assessment institution. All ABSs have to be backed by two triple-A ratings, including the ones issued before the new rule comes into effect.

The ECB had previously required one rating at the triple-A level.

In determining the eligibility of these ABSs, the Eurosystem will apply the 'second-best' rule, meaning that not only the best, but also the second-best-available rating must comply with the minimum threshold applicable to ABSs, the central bank said.

"The Governing Council has deemed it necessary to introduce the above amendments to ensure that the Eurosystem's requirement of high credit standards for all eligible collateral is met," the ECB said. "In addition, the changes, which reflect recent market developments, aim to make a further contribution to restoring the proper functioning of the ABS market."

 

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