The European Central Bank’s term repo window shows no signs of diminished popularity. With the European mortgage-backed market firmly shut, the central bank has continued to back securitization technology and extend liquidity for triple A-rated securities issued by Europe’s banks.
In Spain, the market is in such a poor state that there hasn’t been a single covered bond issued since 2007, and no RMBS issues have been seen in the public markets since August. The banks are using the RMBSs that they have originated as collateral on the ECB’s term repo funding.
Spanish banks borrowed €44 billion in February from the ECB, a return to December levels after a small drop, to $39.6 billion, in January. Only time will tell whether the ECB’s decision to trust the ratings and provide liquidity to triple A-rated MBS is wise. Banks are already starting to include commercial real estate mortgage and second-lien loans in their collateral pools.
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Europe’s credit crunch still biting |
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ABS issuers turn to ECB |
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Financials issuance falls |
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Public sector takes up some of the slack |
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Source: Dealogic |
With no signs of a recovery in the bond markets, it will be very difficult for the ECB to wind down the repo facility in the near term. Bear Stearns’s near collapse last month resulted in Libor climbing to its highest level since December, and with a crippled bond market, banks will look to borrow more from the ECB, not less. As there are no precedents for this level of funding activity from the central bank, so are there no precedents for removing it in these conditions. Even if the ECB decides that it no longer wants to accept such collateral for its liquidity provision, it will be impossible to stop doing so without the risk of severely damaging the banking system. Another Northern Rock-style disaster in Europe would deepen the sense of crisis.
Although it is possible that the ECB will eventually move to make repo funding less attractive, with stricter collateral requirements or simply by making it more expensive, it will not consider winding down the facility until the public markets can absorb the funding requirements that the central banks are covering.
Structured finance analysts are now predicting that other central banks, such as the Bank of England and the Federal Reserve, could end up buying up mortgage-backed securities directly. Deutsche Bank’s European research head, Ganesh Rajendra, suggests that there are reports that a new Resolution Trust Corp could be in the making. But such a vehicle would buy securities rather than the loans as RTC did following the savings & loans crisis in the US in the 1980s. He suggests that, in order to be effective, given that this is a global crisis, a new RTC should not be purely limited to buying US-originated securities.