ECB cracks down on liquidity abuse

The European Central Bank unveiled tougher rules yesterday for banks seeking to use its liquidity-support operations in a clampdown on suspected abuse of the system.

The ECB will increase the safety margin, or "haircut", on most assets it accepts in exchange for short-term funding. It will also impose extra penalties on unsecured bank loans and asset-backed securities valued using models rather than market prices.

The ECB has faced criticism for failing to disc-riminate between different forms of collateral, giving banks too easy a ride in seeking liquidity funding.

The move, which takes effect on 1 February, will increase the cost for banks of securing funds, but the ECB has stopped short of barring asset-backed securities completely.

Jean-Claude Trichet, the president of the ECB, said the "general character" of its liquidity support would be unchanged. The central bank has become increasingly concerned that banks are using the scheme to unload risky securities in exchange for funds.

The changes hit bank share prices across Europe. Of the UK's biggest banks, HBOS fell the most heavily, dropping 6.8 per cent. Barclays, Lloyds TSB and Royal Bank of Scotland also fell. Britain's banks with European operations are widely believed to have used the ECB's scheme.

But markets may be relieved that the measures do not start until after the end of the year, when banks traditionally hoard liquidity.