Even as another embattled British builder, Bovis, pleads for greater intervention to support the UK mortgage market, where new loan approvals are down 65 per cent versus a year ago, the European Central Bank is looking nervously at the support it has provided the sector.
The eurozone mortgage-backed bond market and the banks who rely on it are braced for some potentially harsh medicine following more, stronger hints from governors of the ECB about some form of crackdown on banks’ use of its liquidity facilities.
The use of mortgage-backed debt and other asset-backed securities (ABS) as collateral for central bank funding in Europe has increased significantly since the credit crunch. Strong signs that the ECB is now about to take action over this have the potential to unsettle not just securitisation markets, but other areas too.
“Increasing speculation about diminishing central bank support in illiquid, difficult-to-price asset-backed security markets is likely to undermine investor risk sentiment and raise the level of write-downs in the banking sector,” says Lena Komileva, head of G7 market economics at interdealer broker Tullett Prebon.
Such comments follow a series of hints from members of the ECB hierarchy, including Jean-Claude Trichet, the president, himself, that banks needed to make greater efforts to re-establish other sources of funding.
European ABS markets have not seen a strong reaction yet to such comments, though analysts note trading is very thin due to liquidity being limited generally and it being the last week in August.
There are many securitisation bankers who work in the field of arranging and selling mortgage-backed bonds who would strongly agree with this view and who say it is near impossible to get the market re-started while cheap central bank money is readily available.
Analysts at Deutsche Bank estimate that ˆ260bn ($386bn) worth of ABS have been created and retained by banks, potentially for use in central bank liquidity facilities, since January. UK and Spanish banks, which were most reliant on securitisation, have unsurprisingly been the biggest creators across all currencies.
However, not all of this will have gone to the ECB. The proportion of ECB funding given against ABS collateral has only risen from 12 per cent before the credit crunch to 16 per cent by the end of last year – this would amount to an increase of something in the region of only ˆ20bn.
The tricky questions are over how the profile of the collateral that is used might have changed – in terms of both how risky it is and how old it is, or when it was issued. Some are convinced that central banks have increasingly been used to fund new, or at least more recent mortgage lending.
Radical change is unlikely. Ronald Thomson head of securitisation research at Royal Bank of Scotland thinks it more likely that future securitisations would be affected rather than existing ones, but adds: “Participants may begin to price in liquidity limitations imposed by the ECB as the markets may be forced to absorb more collateral directly.”
By Paul J Davies |
