The ECB should refine its collateral framework in order to continue protecting its balance sheet without putting at risk the safe-asset status of sovereign bonds of the euro area. Currently, eligibility and haircuts applied by the ECB in its refinancing operations depend on four elements: the type of asset, the type of issuer, the residual maturity of the asset, and the rating of the issuer of the asset. This means that the current approach relies heavily on the ratings made by private credit rating agencies. In fact, to determine its own rating of a particular sovereign bond, the ECB takes the best rating out of four accepted credit rating agencies (Moody’s, Fitch, S&P and DBRS) and then maps it to the three “credit quality steps” of the ECB rating scale. This is clearly dangerous for two reasons. First, relying on pro-cyclical ratings from external credit rating agencies can lead to abrupt swings in haircuts. Before the crisis, this approach resulted in applying the same haircut to every euro-area sovereign bond with the same maturity, signalling to markets that all bonds were of the same quality.[…]