With the headline grabbing news that overall ECB asset purchases hit €1tr in August, it would have been easy to miss the fact that one of the components of the programme — ABS purchases — actually shrank over the course of the month, the first time this has happened since it began in 2014.
During August, the central bank was unable to maintain its holdings against the normal flow of redemptions and amortisation, meaning ABS holdings dropped by €226m. In contrast, holdings in the corporate sector purchase programme have almost surpassed the ABS scheme in just three months — corporate bond purchases totalled €6.7bn in August, bringing the total holdings to €19.9bn, in contrast to the €20.1bn of ABS that the ECB has spent two years accumulating.
The relative fortunes of the ECB’s purchase schemes are mainly driven by the amount of supply in each market. European securitization faces an uncertain future, with publicly syndicated deals dwindling while the private market bubbles away. With the ECB only able to buy deals that have at least one other external investor involved, a thriving private market is hardly going to help the scheme.
In addition, the predictable August slump in primary activity meant that the ECB would have been dependent on secondary purchases to prop up its holdings. But all investors found it difficult to acquire secondary paper over the summer, with heavy demand outstripping available bonds and an increase in buy and hold investors further reducing supply.
These market dynamics mean that the ECB’s ABS scheme faces an uphill struggle in comparison to other asset classes, such as covered bonds and corporate paper, where issuance is booming.
But the ABS programme might be placing itself in an unnecessary straitjacket with some of the guiding principles behind purchasing, which need reworking.
The environment in which they were developed two years ago was clearly more optimistic, in terms of the expected levels of issuance in the European ABS market. While some of the guidelines remain prudent — only buying deals with a soundly underwritten, diversified, performing collateral pool — others are unnecessarily reducing the potential universe of deals that the ECB can buy.
The latest Dutch RMBS deal to be announced, Obvion’s Storm 2016-2 transaction, illustrates this point. The transaction has been structured with a revolving pool, which, according to ECB guidelines, means it is ineligible for the purchase programme.
As one of the most frequent and highly regarded issuers of prime Dutch RMBS, in itself considered one of the least risky ABS assets in the market, the ECB should be confident in buying such a deal. If other ABS investors are confident of the quality of assets that are added to the pool, why can the ECB not also be?
There is sufficient flexibility in the ECB’s guidelines to be able to make this change. The principles allow for revolving periods where the underlying collateral is short term in nature, for example, credit cards. In this instance, the guidelines say there must be a documentation that clearly defines the eligibility criteria for new loans going into the pool, to prevent a deterioration in quality.
Expanding this provision to cover high quality Dutch RMBS assets should not be a great leap for central bankers. It won’t result in a turnaround in fortunes for ABS purchases, but it would at least signal that the central bank is serious about the programme, and willing to make adjustments and allowances to help it grow.