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Editorial: The solution becomes the problem

The role of the European Central Bank as the saviour of the European securitization market over the last year is not even up for debate.

There is no doubt that without the bank’s swift intervention, the implications of the liquidity squeeze on the wider economy would have been far, far worse.

But at what point does the market’s reliance on ECB repo funding develop into moral hazard? Are banks, as has been suggested, using the facility to fund new origination? Are they taking advantage of the single rating requirement to offer up weaker collateral to the ECB? What is the unwind scenario of the €200 billion of ABS that has been engineered and retained to tap the ECB window? And, most important, how can a functioning market ever reappear while the ECB (and the Bank of England SLS scheme) are prepared to offer cheaper funding?

Accusations of ECB funds backing new origination stem from the sheer volumes of collateral that have been posted with the ECB. But this can be misleading, as banks may often post collateral with the central bank but not draw the repo line: the collateral is simply posted as a backstop if needed. Indeed, in its April 2008 financial stability report, the Bank of Spain pointed out that ECB borrowing still only represents 1.3%