Banks tapping the European Central Bank to deal with short-term liquidity problems will have to stump up more collateral in future, the ECB ruled yesterday.

The ECB was responding to growing concern that its highly popular lending window was being misused and that some banks were dumping highly illiquid assets of questionable value at the ECB.

Banks have borrowed about €467 billion (£378 billion) from the ECB. Eligible British banks are thought to have been big borrowers because the ECB accepts lower-quality collateral than the Bank of England.

However, from February the ECB will apply bigger “haircuts” – the discount to asset value applied to determine how much a bank can borrow.

The ECB will apply a flat-rate haircut of 12 per cent. Currently the discount is as low as 2 per cent for some asset categories, rising to 18 per cent for the riskiest. In addition there will be a further haircut of 5 per cent for assets for which there is no market price and for which values are based on computer models.

For some complex asset-backed securities, borrowing banks will therefore take an aggregate haircut of 16.4 per cent, the ECB said.

The ECB confirmed that overall the haircuts would be bigger as a result of the changes, which it described as a fine-tuning of its risk-control network.

Jean-Claude Trichet, the President of the ECB, who also announced that eurozone interest rates would be left unchanged at 4.25 per cent, said: “We wanted to be sure that the euro system remains adequately protected.”

British banks have also been able to take advantage of the Special Liquidity Scheme offered by the Bank of England, but the plan is to close this to new loan applications from mid-October. Although money market conditions have improved a little since the nadir of the crunch five months ago, banks are still hoarding cash and are reluctant to lend to one another.

Under the ECB scheme, banks have been able to use potentially risky assets – notably securities backed by questionable Spanish mortgages – to borrow central bank funds with the ECB temporarily assuming the risk.

Gilles Moec, a Bank of America economist, said: “The ECB seems to be increasingly worried that banks are taking advantage of its collateral rules to park risky assets on the central bank balance sheet.”

There have been suggestions of abuse, with some banks fabricating new asset-backed securities purely in order to pledge them with the ECB.

Mr Trichet denied that the reforms would impair the ability of banks to participate in the liquidity scheme.

The ECB also said that it would tighten scrutiny of ties between banks and those who had issued or guaranteed the securities, and place stricter conditions on credit assessments of the instruments. The ECB accepts a wide range of collateral, including state-backed treasury bills, corporate and bank bonds, long-term credits and asset-backed securities, which are often based in part on home loans.

The interbank cost of borrowing three-month dollar and euro funds edged higher, underlining the continuing stress in the money markets. Three-month dollar Libor hit its highest for four months.

Sterling bounced from its record lows against the euro after Mr Trichet made cautious comments about the prospects for the eurozone economy. His gloomy assessment also sent European stock markets plunging.

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