August 8, 2014 / 3:53 PM / 6 years ago

Stronger prospects of ECB ABS programme revive old dilemmas

* ECB’s Draghi resolute on ABS buying programme

* Industry fears cheap central bank funding could cripple market

By Anna Brunetti

LONDON, Aug 8 (IFR) - The head of the European Central Bank Mario Draghi made it clear yesterday that the bank’s preparatory work on an ABS buying programme is more than empty words, but industry players keep warning against the dangers that could stem from such a move.

The EU’s top central banker reiterated the ECB has “intensified” work to set up a purchase programme targeted at ABS securities, as a way to boost credit transmission onto the capital markets and the real economy.

“If we were to work on things that don’t happen, we wouldn’t spend our time well,” Draghi said.

In conjunction with the Bank of England, the ECB aims to kick-start a new securitisation market based exclusively on sound and straightforward products, Draghi said.

“Transparent means that you can actually go through and price them well. And real means that they are not going to be a sausage full of derivatives,” Draghi summarized.

Regulation remains one of the main hurdles to getting the economics of the ABS market to work. But “we are proceeding with our work regardless of what the timing is for possible regulatory changes in this area,” Draghi said.

“No matter what regulators will be doing, we want to be ready.”

While Draghi’s determination may buoy the industry, it also revives old dilemmas. Central banks devising yet another source of cheap funding for banks may be a further hindrance to ABS, as it could crowd out private investors who can’t compete with unrealistically low spreads, some ABS players argue.

Between the ABS volumes it holds as collateral for repo transactions with European banks, and funding programmes it run repeatedly over the past few years, “the ECB is de facto the largest holder of ABS in Europe,” said Greg Branch, CIO at European structured finance specialist SCIO Capital.

By gobbling up large shares of ABS issuance as collateral in return for cheap financing, central bankers have skewed banks’ behaviour towards the subsidized mode, Branch said. Prior to 2007, banks would hardly use repo facilities, he said.

“The easiest way to fix the market is to force issuers to go back to it,” Branch said. One way to do that would be to phase in higher repo rates, which would push banks to issue in the public markets.

ECB rates on ABS funding should be increased from 25bp to “a number which is higher than the market but not high enough to unduly penalize” lenders needing liquidity in times of disruption, Branch said.

If ECB rates were gradually upped to 100bp, banks funding themselves via repo would incur additional costs of about EUR7.5bn per year on their ABS trades, SCIO Capital estimates.

Conversely, with “AAA spreads on most ABS in Europe significantly tighter than 100bp,” banks would pay significantly lower margins to private investors, in the area of EUR2-4bn per year, Branch said. (Reporting By Anna Brunetti, editing by Anil Mayre)

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