Collateral: a guarantee mechanism
As part of the Eurosystem's refinancing operations, the Banque de France requires its counterparties to pledge collateral in return for the liquidity it provides. This is known as “monetary policy collateral”. This mechanism is similar to traditional collateral, such as a mortgage on a residential loan, which allows the creditor to be repaid if the debtor defaults. To protect its balance sheet, the Banque de France requires its counterparties to pledge assets for a value at least equivalent to the outstanding amount of credit. These "eligible assets" must comply with a regulatory framework defined at the Eurosystem level.
Assets accepted as collateral
Assets accepted as collateral in Eurosystem refinancing operations are classified into two categories, depending on whether or not they are marketable (on a financial market).
Marketable assets
Eligible marketable assets are debt instruments issued by corporates, public issuers (i.e. sovereign, supranational or local and regional authorities) and banks: senior unsecured bonds, covered bonds or asset-backed securities (ABS).
Non-marketable assets
Non-marketable assets correspond to bank loans pledged directly by monetary policy counterparties (credit claims). Debtors and guarantors of eligible credit claims are non-financial corporations, public sector entities (excluding public finance companies), multilateral development banks and international organisations. The Banque de France will also accept residential loans granted to private individuals until 30 June 2023.
Eligibility criteria
Not all assets belonging to categories accepted as collateral are actually eligible and they must comply with eligibility criteria in terms of their simplicity and quality in order to protect the Eurosystem's balance sheet. These criteria relate to their credit quality, structure and repayment terms and are harmonised at the Eurosystem level.
Every day, new assets are analysed by Banque de France staff, who assess whether or not they meet all the criteria set out in the collateral framework. Assets complying with all criteria are deemed "eligible" and may be pledged as collateral in refinancing operations. The list of eligible marketable securities is updated on a daily basis and is publicly available on the Banque de France and ECB websites.
Global Collateral Management (3G)
Not all eligible assets are necessarily pledged as collateral for outstanding amounts of refinancing. When they are, they are said to be used or mobilised. Moreover, each asset does not cover a specific refinancing operation. Since 2008, the Banque de France has launched a “Global Collateral Management” system known as 3G: each monetary policy counterparty adds assets to its pool (known as a "3G pool") that can serve as collateral for outstanding amounts of refinancing. The total value of this pool must be at least equivalent to the counterparty’s outstanding credit. Any eligible asset may be added to or withdrawn from the pool, provided the outstanding credit is always fully covered. Every day, Banque de France staff check the eligibility of the assets in the 3G pool and the outstanding refinancing coverage ratio.
Valuation of eligible assets
To calculate the amount of collateral pledged by a counterparty, the Eurosystem considers the value of the assets, to which a “haircut” is applied. Credit claims are valued at their nominal amount, while securities are valued at their observed or theoretical market price. A valuation haircut is then applied to cover the risk of price variations. The applicable haircut depends on a number of factors, including the type of asset and its credit quality and maturity.
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