These  4  BIS Review 68/2008  two features of the operational framework in combination with the large scale temporary refinancing operations have certainly helped the Eurosystem to effectively mitigate funding liquidity risk for counterparties when interbank markets stopped functioning properly. In order to understand better the specific role which ABSs fulfil in the implementation of our monetary policy, let me just remind you of some key elements of our collateral framework. The Eurosystem has a broad definition of debt instruments and against this background a wide range of public and private securities, including asset-backed securities, can potentially become eligible if they fulfil all the other eligibility criteria. Indeed, compared with the traditional concept of other central banks in the world, the Eurosystem accepts a large volume of high quality ABSs, and has done this well before the outbreak of the financial market turmoil. In addition to the general eligibility criteria, such as the denomination in euro and compliance with our minimum rating threshold, some specific requirements apply to ABSs: (i) only the most senior tranche of an ABS structure is eligible; (ii) ABSs must be backed by assets that have been legally acquired by the special purpose vehicle (SPV) in a manner that the Eurosystem considers to be “true sale”, and (iii) the issuing SPV must be located in the European Economic Area (EEA). There are no special restrictions on the underlying assets backing the transaction, with one exception, namely that underlying asset pools may not consist of credit derivatives.

In particular, thanks to the built in flexibility of its collateral framework, the Eurosystem has been able to step in effectively when intermediation in interbank markets deteriorated, without the need to make changes to its framework. As a side effect of the broad range of assets accepted as collateral, the framework helped us also during the turmoil to address liquidity squeezes in some markets, including the ABS market, as it mitigated refinancing risks for asset classes that had become illiquid. This has contributed to financial stability in the euro area. Other central banks may have had those effects in mind when they initiated changes to their operational framework in the wake of the turmoil, leading to a significant degree of convergence among the various frameworks. Of course, the ability of the Eurosystem’s operational framework to respond to the challenges for monetary policy implementation posed by the recent period of financial market volatility does not mean that there is no scope for further improvements and refinements. For instance, the eligibility criteria for marketable debt instruments have been kept general in order to ensure that the collateral framework of the Eurosystem is responsive to financial innovation. There is therefore a concomitant need for the Eurosystem to refine its collateral policy, including the risk control measures, and ensure that the collateral continues to meet the Eurosystem’s risk tolerance level and allows the effective implementation of monetary policy. This has already been done in the past from time to time, with a view to further enhance the collateral framework.