Lloyds Banking Group, Royal Bank of Scotland and Santander UK have made up almost half of the European ABS market this year. The three UK issuers sold most of their bonds through a series of giant, dollar-denominated mortgage master trust issues, which have gone in large part to US bank treasuries.
But the appeal of the public securitisation market was always going to be limited this year. If a country had a covered bond culture (France, Germany, Austria, and Scandinavian countries) its banks would do covered bonds. If a bank had a double-A rating, or could afford to pick and choose its funding sources, it would do covered bonds. And if it was southern European, it would use the ECB.
Only non-banks, small banks, or those with big pools of non-mortgage assets would dabble at the edges.
That’s why the news that Barclays is launching a new UK RMBS is vitally important. If a bank like Barclays, with its double-A rating and cast-iron covered bonds, can justify an RMBS, so can plenty of others across Europe.
The deal will have dollar tranches, and if recent RMBS are anything to go by, could easily see $2bn or more bought by bank treasuries.
This is exactly what securitisation is supposed to be for.
Banks overflowing with American deposits and American assets should be able to diversify their holdings. Turning mortgages into securities is supposed to plug them into the capital markets, to access footloose global money.
It’s even the same money, in large part. One bank treasurer told EuroWeek that a smaller US money market industry (which has been reducing its exposure to European banks) had driven more dollars into deposits at the big domestic banks — pushing the banks to reach out into European ABS.
JP Morgan, Citigroup and Wells Fargo don’t want to buy a UK branch network, nor do they want exposure to the FSA’s punitive regulatory initiatives. They just want exposure to the underlying assets.
This ought to be pretty benign, from a regulatory perspective. Cross-holding of senior unsecured means an expanding financial sector balance sheet; cross-holding of asset-backed instruments does not.
Liquidity rules likely to be adopted in Europe don’t recognise this crucial difference, but no matter — US banks probably will.
So far, there’s been no evidence that US bank appetite for European ABS is flagging. And why should it? Shunning European bank debt doesn’t mean shunning European assets.
Unless the funding environment starts to look a lot more solid for European banks, treasurers should be jumping at the chance to bring the world’s biggest capital market back on board. Barclays is showing the way. Following would be bold — but prudent.