June 5, 2014 / 5:02 PM / 5 years ago

ECB keeps ABS buying programme on the table

* ECB increases prep work for ABS purchases

* Market still in the dark on details

* Purchases alone won’t solve low bank lending

By Anna Brunetti

LONDON, June 5 (IFR) - The European Central Bank kept alive market hopes it would undertake ABS purchases on Thursday, as part of its multi-layered action to tackle stagnant lending but its President, Mario Draghi, gave few details on how it would actually work.

“The Governing Council decided to intensify preparatory work related to outright purchases in the ABS market to enhance the functioning of the monetary policy transmission mechanism,” Draghi said.

The ABS programme that central bankers “are striving for,” Draghi said, would pivot around three key features for an ‘ideal ABS’. The assets should be simple, so no complex CDOs, they should be real, so no derivatives and should be transparent - with full disclosure of information.

Draghi said the ABS purchases option in his anti-deflation package would only be activated if further easing were needed.

However he appeared to position ABS purchases as a priority as it would potentially channel sizeable inflows into the SME sector and the real economy, he said.


Regular rate cuts in the past few years have failed to boost lending to the SME sector, and nor have various central and national liquidity operations.

Many banks boast an abundance of liquidity, but are cautious to lend due to their parlous capital positions and fears of future regulatory demands.

Researchers at Brussels-based think tank Bruegel recently flagged that “When several banks have vulnerable capital and liquidity positions, a monetary stimulus aimed at increasing bank lending to the private sector is less effective, similar to what happened after the three-year longer-term refinancing operations (LTRO) in late 2011 and early 2012.”

For example, the UK Funding for Lending Scheme, another type of refinancing operation, failed to translate into sizeable levels of lending. According to Bank of England data, since the scheme was activated in August 2012 banks drew £41.876bn as of January this year, but net lending since end of June 2012 stands at less than one quarter, at £10.286bn.

Although an unconventional tool for central bankers, quantitative easing through either corporate debt or ABS, or a combination of the two, would address different issues in the current economic jigsaw. It would help lenders to offload risk and help secure SMEs access to funding.

But many argue that ABS purchases would stumble upon numerous hurdles.

The most obvious fact is that the outstanding ABS market itself is simply too small, and the proportion backed by SME assets minute. According to Barclays, there is 110bn SME ABS outstanding, of which 13.3bn is placed with investors “and would theoretically be available for secondary market purchases.”

Moreover, were the ECB to buy exclusively Triple A tranches, only a “significantly smaller amount ranks senior in the capital structure,” Barclays analysts said in a report.

The central bank could focus on RMBS, as they showed the most sound performance. This would bring the amount of ABS “immediately available for purchase,” to 330bn, according to Bruegel analysts.

Meanwhile, the regulatory backdrop is still identified by many, and by Draghi himself, as the main battlefield for any restoration of the ABS market. Asset purchases, in this sense, would remain fruitless without regulatory changes.

He said there needed to be a review of regulation to eliminate some of the undue discrimination, reiterating a point raised in the joint paper published by the ECB with the Bank of England last Friday, although there would likely remain some pricing disparity between ABS and other markets.

“Investors require senior ABS to provide a higher return than comparable investments” such as covered bonds, Barclays analysts said. However, such “regulation yield premium” would be driven not only by higher capital charges and haircuts, but also by higher operational requirements for investors.

“The penalty would not necessarily reduce if the ECB became an additional buyer of senior bonds,” the team said.

“As a result, senior securitisation would likely remain a relatively expensive funding source for banks” they said. (Reporting By Anna Brunetti, editing by Anil Mayre and Alex Chambers)

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