ECB said that, after a review of its risk framework, it
would accept lower-rated
asset-backed securities (ABS) into its funding programme
and reduce the cost of lending against the
represents a return from a dark place for mezzanine tranches of
ABS, which were widely vilified during the financial crisis for
the huge losses they incurred.
who will see lower interest rates, will also be pleased, but
for issuers of debt the new rules do not come without a cost,
particularly for those who have become inured to drinking from
the ECB tap in exchange for covered bonds.
concern, particularly in
Germany, that the ECB is carrying too much risk on its
balance sheet, which means that major relaxation of collateral
requirements is not politically achievable, says
Christian Schulz, a London-based senior economist at
that reason, they have balanced their decision by tightening
requirements for some non-SME-related assets, in effect giving
with one hand and taking away with the other.
securitization bonds will decline to 10% from 16%, the ECB
says, while provisions for bonds rated BBB plus or minus will
fall to 22% from 26%.
addition, for transactions that comply with loan-level
reporting requirements autos, consumers, leases, RMBS
and SME ABS the minimum rating requirement for
eligibility will drop from AAA to A-, overcoming eligibility
issues caused by the generic rule that securitizations must not
be rated higher than their domestic sovereign.
headlines suggesting the contrary, haircuts on all covered
bonds have not been increased to offset the impact of the ABS
changes. In fact, many covered bonds haircuts will also
the central bank has introduced a retention add-on charge for
covered bonds, meaning that issuer retained bonds posted to the
ECB incur an additional 8% haircut for AAA to A- rated bonds
and a 12% hit on BBB-rated securities.
may seem like a victory for ABS, we must remember that ABS
bonds, whether distributed or not, are only as good as retained
covered bonds in haircut treatment, says one industry
It will be
no mean feat if the ECB succeeds in boosting confidence in the
ABS market. The market has retreated into a pale shadow of its
former self in the recent period, with year-to-date issuance in
Europe running about a 10th of the level in the US.
amid an ongoing analysis of the impact of the change, one group
which seems likely to benefit is
Europes SMEs, which will attract more loans from
ABS-related bank funding than from mortgage-focused covered
the ECB manages to create a bigger market for ABS, the impact
will be to drive down borrowing costs, says
this change is not a big gun the most important impact
of SME borrowing is the central banks outright monetary
purchases [policy] and the work of public investment banks and
European development banks, which are able to bypass the
commercial banking sector.
government, through state development bank KfW, recently lent
the Spanish Development Bank 1 billion for lending to
SMEs, says Schulz.
that face the most acute funding problems are those based in
Spain and Italy, which pay around 200 basis points more than
their German counterparts, according to
the additional cost is justified by the impact of the poor
economic climate, but banks in the periphery are also trying to
de-risk their balance sheets by restricting credit to
Frankfurt have recognized that if the ECB is to succeed in
enforcing austerity in peripheral countries, it must be
accompanied by private investment, and accepting ABS as funding
collateral goes some way towards encouraging that.
it is not envisaged that the central bank will expand its
balance sheet by buying ABS outright or trading on the
the ECB is trying to do is to show its commitment, says
Schulz. It wants to give the message to banks in these
countries that if you lend to SMEs we are with you, and
we will do what we can to make sure it pays
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