Mario Draghi’s plan to spur growth by getting the European Central Bank to buy asset-backed securities and persuade lenders to sell more of the bonds is being met with skepticism by the region’s biggest money managers.
The ECB’s president is considering broad-based asset purchases, known as quantitative easing, to ward off deflation. He’s also promoting the market for bonds backed by loans to small- and medium-sized enterprises in a bid to increase funding to the businesses that employ about 70 percent of the European Union’s private-sector workers.
Draghi is seeking to free up bank balance sheets by reviving Europe’s $2.1 trillion ABS market, which contracted 32 percent since 2009 as regulators cracked down on the debt blamed for deepening the financial crisis. With lenders’ profits being squeezed by tougher capital rules, money managers are concerned they’ll use the opportunity to boost earnings.
“It would be nice for banks as they could fund very cheaply, but would they pass on the cheap funding to customers or will they keep the higher profit margin themselves?” said Frank Erik Meijer, The Hague-based head of ABS at Aegon Asset Management, which oversees 250 billion euros ($347 billion) of assets. “I don’t see SMEs benefiting a lot because banks will probably try to keep the additional profit margin to increase their capital base.”
Sales of bonds backed by mortgages, auto loans and credit-card payments fell to $102.5 billion in Europe last year from $449 billion in 2007, an almost 80 percent decline, according to JPMorgan Chase & Co.
In the U.S., the Federal Reserve’s efforts to stimulate securitization, including making loans to finance bond purchases, fueled confidence in the market and held issuance above $140 billion at the height of the crisis in 2008 and 2009, when sales in Europe were less than $15 billion. Banks in the U.S. sold $174 billion of asset-backed bonds last year.
Securitization can enhance banks’ capacity to lend by allowing them to bundle existing loans into bonds that can be sold on without expanding risk assets.
Reviving Europe’s market for ABS, which Draghi last year described as “dead”, is top of the political agenda because lending has been contracting for almost two years. The ECB and the Bank of England are asking regulators to ensure rules safeguarding the financial system don’t unnecessarily impair the securities’ use.
The ECB has also signaled plans to ward off deflation may involve buying asset-backed debt to pump more cash into the economy. The headline annual inflation rate missed forecasts in rising to 0.7 percent from 0.5 percent in March, leaving investors to look to a May 8 meeting of central bank policy makers for further quantitative easing clues.
“The expected benefits to the economy of ECB purchases rely on the assumption that banks will lend more,” said Michel Fryszman, Paris-based head of ABS investment at AXA Investment Managers, which oversees about 550 billion euros of assets. “That will only happen if the lack of lending was due to the lack of a securitization market, and I am not sure it was.”
The ECB is no stranger to providing support to the region’s economy through the asset-backed debt market. The central bank holds 324.8 billion euros of notes as collateral for loans to the region’s banks, which is prompting Oldrich Masek, the London-based head of European ABS at JPMorgan, to question what benefits can be gained by having any more.
“The ECB initiated easing a long time ago through its repo program and direct purchases would do more or less the same thing in terms of monetary policy,” said Masek.
The global banking crisis followed by Europe’s sovereign turmoil transformed the region’s ABS market, prompting banks to issue and retain the securities to build their reserves of collateral eligible for ECB funding rather than selling to investors.
All of the 477.6 billion euros of European ABS issued in 2006 were sold to investors, according to the Association for Financial Markets in Europe. When the crisis hit a year later, 29 percent of issuance, or 175.2 billion euros was retained, while in 2008 that number reached 87 percent, with 713.4 billion euros retained.
The largest part of Europe’s ABS market is notes backed by top-rated U.K. residential mortgage-backed securities. The extra yield investors demand to hold the notes, compared with benchmark rates, fell to 48 basis points, or 0.48 percentage point, last month, according to JPMorgan. That’s the least since November 2007 and down from 425 basis points in 2008.
“Likely, the ECB is the biggest ABS fund manager in Europe and thus has a vested interest in reviving the market,” said Fabrice Susini, global head of securitization at BNP Paribas SA in London. “It can have less of a direct effect in changing regulation, which is the biggest impediment, but what it can do is put some money on the table and influence the market through direct purchases.”