THE European Central Bank is easing its lending rules to encourage banks to provide more credit to firms and help Europe's stagnant economy recover.

Lack of credit is a major factor holding back the economies of eurozone countries such as Spain and Italy.

The ECB has set its interest rate benchmark at a record low of 0.5 percent, but shaky banks are not passing those low rates on to companies and households.

One way around that is if banks can have loans packaged into securities - called asset-backed securities - and sell them. That would free up money for more loans and raise cash from investors who wouldn't normally loan directly to companies.

For instance, an insurance company or investment fund that would not normally loan to individual small firms could still buy asset-backed securities if they carry a strong credit rating. That expands the pool of money available.

The ECB said yesterday it would now accept lower-rated asset-backed securities as collateral for the loans it gives to banks.

The ECB's move will encourage banks to create more such securities, since they could use them to get credit themselves from the central bank at its regular offerings.

The bank made the move, even though it has long stressed that other European Union institutions, such as governments, have a major role to play in further loosening credit in the parts of the eurozone hardest hit by the currency union's financial crisis.

Beyond yesterday's measures, the ECB is also in talks with the European Investment Bank on further steps to encourage a market for asset-backed securities as a source of credit for small- and medium-sized businesses. One possible measure could be EIB guarantees for the packaged loans, which would raise their credit ratings and enable a broader range of investors to buy them. The EIB is backed by eurozone taxpayers and run by their governments.

The ECB said in its statement yesterday that it would now accept asset-backed securities with A ratings from at least two ratings agencies, instead of requiring two AAA ratings.