March 12, 2012 / 3:00 PM / 7 years ago

Asset-backed securities seek new look to shed bad image

BRUSSELS/FRANKFURT, March 12 (Reuters) - Asset-backed securities, blamed for triggering the financial market chaos that has toppled banks and sucked in countries, are undergoing a brand makeover but they may find it hard to shake off their old image.

Financial lobby groups are working on a new ‘quality label’ for bonds secured against bundles of assets including credit card debt and car loans, with the aim of rekindling demand.

In future, they hope top-notch ABS will be known as PCS, or Prime Collateralised Securities.

The new brand is designed to polish the image of assets that could be used by the European Central Bank as security - a stamp of approval that would reassure investors who still associate them with the subprime U.S. mortgage loans that sent shockwaves through banks in Europe and beyond after the last five years.

Its architects are optimistic the brand will be seen as low-risk, and have identified almost 1 trillion euros of securitised loans that might qualify for the PCS label.

That includes more than 750 billion euros of debt backed by mortgages, while some 100 billion euros of small business loan securitisations and a similar volume of securities backed by consumer debt and credit card loans could also qualify.

“There is a strong commitment to make this happen, including public comments of support from the ECB, European Commission ... and other authorities,” said Sebastian Fairhurst, Secretary-General of the European Financial Services Round Table, one of two lobby groups organising the programme.

“The initiative is expected to bring added quality, transparency and standardisation to the market, with a goal of improving overall liquidity.”

The project inspires both enthusiasm and nervousness among observers. One banker, speaking anonymously, expressed concerns that it could be abused by banks to disguise toxic assets.


With interbank lending still fragile in Europe despite the ECB’s recent 1 trillion euro liquidity injection, rejuvenating demand for securitised debt would throw a lifeline to banks.

The blessing of the ECB, which has already lowered standards for the collateral it accepts in return for providing lenders with funds, is important for the new brand, and its officials are following developments.

If the ECB were to use the PCS standard as one of the criteria for choosing collateral, it would encourage other investors to buy.

“The PCS eligibility criteria has also been designed to meet the central bank’s eligibility criteria,” said one executive familiar with the plan. The ECB declined to comment.

The central bank considers factors including credit ratings when deciding whether ABS can be used as collateral. It currently accepts those backed by home loans and small-company credit, having lowered the minimum acceptable rating for such securities to single-A from triple-A in December.

Some policymakers at the central bank want to find new assets that can be used as security for funding given to banks ranging from overnight money to three-year loans. It has already launched an initiative requiring a loan-by-loan breakdown in ABS offered as security.

ECB President Mario Draghi said last month the central bank was not planning to loosen its collateral requirements further, however, saying the next change in the rules should be a tightening.

Another ECB policymaker, Finland’s Erkki Liikanen, said last year the central bank should rethink its whole collateral framework after the crisis. He said that the week-long main refinancing operations could have tighter rules than operations addressing banks’ specific liquidity needs.

The PCS project is being organised by a Brussels-based lobby group chaired by Swiss Re chairman Walter Kielholz, the European Financial Services Round Table, and the Association for Financial Markets in Europe, representing investment banks including Deutsche Bank and Goldman Sachs.

Banks are also hoping to persuade European regulators to include high-quality securitised debt among the assets they can use in their liquidity buffers. European Union countries are negotiating a framework for bank capital to be finalised in coming months.


Unlike the subprime mortgage-based ABS that unravelled in the crisis, the new standard aims to select high quality loans with a low rate of default.

It will exclude complex structures such as resecuritisation, which mixed up debt already committed as security for bonds and used it for separate bond issues.

“There has been a lot of lobbying saying that ABS, particularly European ABS, is not that bad and those lobbyists are finding some favour now among regulators and the ECB,” said Dipesh Mehta, an analyst with Barclays Capital.

“The ECB is showing willingness to accept more ABS as collateral. The PCS initiative might satisfy regulators more and may make it easier to repo (repurchase agreement) bonds at the ECB.”

Issuance of ABS spiked in Europe in 2008 at more than 700 billion euros and three years earlier in the U.S. when it topped 2.6 trillion euros. Just 234 billion euros of ABS was issued in Europe last year, according to research by AFME.

But talk of its return worries some at Germany’s Bundesbank. Buba chief Jens Weidmann wrote to Draghi last month, expressing concerns about risks stemming from a decision the ECB took in December to ease rules on the collateral banks must put up to tap its funding operations, a central bank source said.

That decision, which Weidmann opposed and now wants reversed, resulted in some 800 banks - most of them German - partaking in the ECB’s second offer of cheap money last month - a jump from the 523 bidders in a similar round in December.

“The ECB has the ultimate role of provider of unlimited liquidity,” said Guntram Wolff, of Brussels think tank Bruegel. “Providing unlimited liquidity means that it may have to lower its capital standards to zero.”

“The lower the collateral requirements, the higher the risks for the ECB and national central banks,” said Wolff. “That is something that makes Germany’s Bundesbank very nervous. We will only know the extent of these risks in two or three years time.”

Reporting By John O'Donnell and Paul Carrel; Additional reporting by Sakari Suoninen in Frankfurt; Editing by Catherine Evans

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