ECB eyeing collateral rule tightening - report

FRANKFURT, Aug 24 (Reuters) - The European Central Bank is set to tighten its collateral framework, ECB Governing Council member Yves Mersch was reported as saying over the weekend.

"At the margins there can still be cases where you see dangers of (banks) gaming the system," Mersch told Bloomberg at a Kansas City Federal Reserve-organised meeting of central bankers in Jackson Hole, Wyoming.

"The governing council has been discussing the whole issue" and has agreed on a "certain amount" of refinement to existing rules, he was quoted as saying.

The rules govern what banks can and can't use as insurance in return for access to ECB funding.

As banks have scrambled to get access to capital amid the credit crisis, some have come up with increasingly creative ways to tap into the ECB's collateral pool, raising eyebrows among some officials.

Australia's Macquarie, for example, recently had Australian car-loan assets accepted by the ECB after a complex routing of the assets through a euro-zone affiliate.

Over the last two months the head of the ECB, Jean-Claude Trichet, has said the bank would look at its collateral rules and revise them if necessary.

"It's not a broad-based revolution," Mersch said of the possible changes. "We are satisfied with our framework, but since there are always on the margins, evolutions, we have to adjust our framework regularly to market practices."

He added that they would focus on "some instruments."

While the ECB has been eager to reassure troubled money markets that it will keep providing liquidity no matter what, its concern is that banks may take advantage and leave it holding assets worth far less than it thought.

But with the markets in such a delicate state, the ECB knows it would be far too risky to turn off any funding taps or make any grand gestures.

Mersch was quoted as saying the ECB's response to any individual instances of abuse "would not necessarily be a question to be discussed publicly," saying it instead hoped to use "moral suasion."

"Our framework is complex, and if we can warn people that this is not acceptable beforehand, and they adjust in due time, we would be satisfied," he added. (Reporting by Marc Jones; Editing by Braden Reddall)