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ABS's potential powerful future ally in Europe

Draghi 2 1388
By Graham Bippart
30 Jun 2015

More than half a year into the European Central Bank’s Asset-Backed Securities Purchase Programme, there are some in the market who are dubious about the impact the initiative can have on the European ABS market.

Despite spreads being lower year over year and new entrants deciding to issue, many in the market continue to say the impact of the ECB’s programme has been marginal. 

Since April, the ECB has increased its weekly purchases from €5.5bn to €8.6bn this week — about a 56% increase. That is much less than the 165% increase over the same period seen in the public sector purchase programme, though more than the 36% in covered bonds. But ABS remains much the smallest portion of the ECB’s purchased securities over around €300bn across the three sectors.

In a market with only €600bn outstanding and sporadic new issuance, the ECB appears to be doing what it can to buy without crowding investors out.

Many argue that without meaningful regulatory change as well as the ECB's purchase programme, new issuance is not likely to blossom. The big obstacle for policymakers and central banks appears to be the complexity of ABS — hence the market’s initiative to certify Prime Collateralised Securities, and projects from the EBA, the central banks, the Basel Committee and others to designate “simple and transparent” securitizations.

But just as important as certification schemes is better knowledge on the regulatory side of the fence.

Familiarity will breed reassurance and comfort about ABS at the ECB, a less tangible, but potentially larger benefit than tighter spreads that tempt more marginal issuers to market.

The ECB has been a monolithic presence in the ABS market before as a repo counterparty, but its purchase programme has involved deeper due diligence and more concerns for cashflows and credit risk. The central bank simply used the Banque de France’s existing mark-to-model approach to value ABS posted as collateral, but never delved deeper into the sector, snug behind its prudential haircuts.

Fernando González, head of risk strategy at the ECB, said in his keynote address to the Global ABS conference that since beginning the programme in November, “the Eurosystem has screened and examined hundreds of transactions, which has built up significant ABS expertise across asset classes, jurisdictions, and vintages”.

That experience could profoundly benefit the future of the ABS market in Europe, as new regulations continue to be discussed and implemented in the coming years.

“This knowledge gained is leading to positive spillovers,” said González. “For example, the Eurosysterm is now able to better contribute to regulatory discussions on simple, standard, and transparent ABS. Elsewhere, and the Eurosystem datasets contribute in helping regulators examine the desirability and impact of their proposals, such as for ABS transparency requirements.”

The ECB cannot directly re-regulate securitization, but it is the supervisor for the eurozone’s largest banks, and is centralising more and more regulatory expertise under its roof. As Banking Union and the Single Supervisory Mechanism ramp up, the ECB’s voice is only going to become more important in international financial regulation discussions.

So, while sovereigns and covered bond issuers can celebrate paying almost nothing to issue while the QE party lasts, ABS issuers and investors alike may have something really meaningful to look forward to: a powerful regulatory figure that actually understands the product.

By Graham Bippart
30 Jun 2015