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TheStreet Open House

Key Measures In Draghi's First Year As ECB Chief

The long duration of the loans gave banks security that they would have the money they needed until 2015. Another key feature was looser collateral requirements that let banks post different types of securities in return for loans. That gave them more chances to obtain money â¿¿ but increased the ECB's risk of losses as it takes on shakier securities.

The loans provided indirect relief to heavily indebted countries that were facing high borrowing costs in bond markets. Some banks took the cheap money and started buying higher-yielding government bonds with it. That raised bond prices and lowered bond interest rates, which equates to lower borrowing costs for struggling countries, such as Spain and Italy.

LOWER INTEREST RATES: The ECB has cut its key interest rate by a quarter percentage point three times since Draghi become president. The so-called main refinancing rate is now at a record low of 0.75 percent. That is what the bank charges on credit it offers to eurozone banks. The rate influences interest rates on the loans banks provide to each other, businesses and consumers.

The ECB has lowered the rate it pays banks for depositing their money with the ECB overnight to zero. That increases the incentive for banks to lend money to each other or to businesses rather than park it with the ECB.

RESERVE CUT: In December, the ECB cut the amount that banks must keep on reserve with it, from 2 percent of their assets to 1 percent. That freed some ⿬100 billion for the banks to use elsewhere.

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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