MARKETS The extraordinary measures undertaken since the start of the crisis by the Eurosystem, that is, the European Central Bank and the 16 national central banks of the euro area, have proven key to mitigating the liquidity risk in the banking sector and avoiding a collapse of the money markets in the eurozone.
The effectiveness of the Eurosystem’s response has been partly due to the wide range of collateral that the Eurosystem accepts in its refinancing operations. The monetary authority’s collateral framework allowed the use of asset-backed securities (ABS) as eligible instruments in these operations even before the sudden appearance of the difficulties in the funding market. This proved a great support during the crisis as it helped to avoid a sudden and disruptive unavailability of funding to originators of ABS. Indeed, banks were able to fund ABS that could no longer be financed in the market, and at the same time they created large ABS collateral buffers for the purpose of accessing central bank liquidity.
