The European Central Bank hired BlackRock Inc., the world’s biggest money manager, to advise on developing a program to buy asset-backed securities.
BlackRock Solutions, a unit of the New York-based company, will provide advice on the design and implementation of a potential ABS-purchase plan, an ECB spokesman said in response to e-mailed questions. Safeguards against any conflict of interest are included in the agreement, the spokesman said. The value of the contract wasn’t given.
ECB President Mario Draghi said in June that the central bank is intensifying preparations to purchase ABS as it strives to revive the faltering euro-area economy. The measure could help revitalize a $1.9 trillion market that has contracted 34 percent since 2009, and may ultimately be a part of a large-scale program of quantitative easing.
“Hiring an adviser who knows the ABS market and has experience investing in it before, during and after the crisis is clearly positive,” said Dipesh Mehta, a director of securitization research at Barclays Plc in London. “However, the appointment in itself is simply another step on the path toward QE. It is the format of QE that is key, with many questions to be answered on what bonds to buy and how to do it without jeopardizing the existing investor base.”
Brian Beades, a spokesman for BlackRock, declined to comment on the appointment. The company’s shares fell 1 percent to $333.24 as of 11:19 a.m. in New York. They advanced 6.3 percent this year before today, compared with the 4.1 percent increase in the Standard & Poor’s 18-company index of asset managers and custody banks.
BlackRock was one of four co-managers of a Federal Reserve program during the height of the credit crisis in 2008 to buy residential mortgage-backed securities in the U.S. The Fed also called on the company to analyze the assets of Fannie Mae and Freddie Mac after the government took an 80 percent stake in the two mortgage giants.
BlackRock is required to ensure effective separation between its project team working for the central bank and its staff involved in any other ABS-related activities, the ECB spokesman said. External audits related to the management of conflicts of interest will also be made available.
The company, headed by Chief Executive Officer Laurence D. Fink, has more than $4 trillion of assets under management. It is among the largest investors in European ABS, with portfolios spanning debt backed by commercial mortgages to auto loans, according to data compiled by Bloomberg.
The final decision on the design and implementation of any ABS-purchase program will be taken by the ECB’s Governing Council, and the execution will remain the responsibility of the central bank, the spokesman said.
Asset-backed securities are bundles of individual loans such as mortgages, auto credit and credit-card debt that are sold on to investors, allowing banks to share the risk of default and encouraging them to offer more credit.
An ECB program could herald a softening of opinion toward the products once blamed for deepening the financial crisis. Regulators have been wary as sometimes-complicated structures can obscure the true riskiness of the underlying assets, as was the case with securities backed by the U.S. sub-prime mortgage market, which imploded in 2007.
Draghi has repeatedly said the market is being held back by regulators. Lenders from Barclays to Deutsche Bank AG have said capital rules for the debt are becoming so onerous they may shun some ABS, while Lloyds Banking Group Plc and New York-based MetLife Inc. are among investors to withdraw from the market as they wait further clarification on the rules.
“I would see an ECB buying program for European ABS as a strong endorsement,” said Calvin Davies, The Hague-based head of residential real estate and securitized investments at ING Investment Management, who helps manage 16 billion euros ($21 billion) of ABS. “A program could be designed and implemented to prime the pump by stimulating issuance of good-quality transactions into the market, rather than potentially crowding out existing or new private investors.”
Less than 1.6 percent of asset-backed debt outstanding in Europe in mid-2007 has defaulted, while the cumulative default rate in the U.S., where securities backed by the U.S. sub-prime mortgage market imploded, was 19.3 percent over the same period, Standard & Poor’s said in a report yesterday.
The option of buying ABS was among a range of ECB measures announced in June. Officials also cut the benchmark interest rate to a record low, took the deposit rate negative and extended an offer of unlimited liquidity until at least 2016. Starting next month, the ECB will offer funding to banks linked to real-economy loans in an attempt to boost credit supply.
The Frankfurt-based central bank is battling to avert deflation in the euro-area. The economy stalled last quarter and a report this week is predicted to show inflation slowed in August to 0.3 percent, the weakest since 2009.
Draghi warned last week that investors’ inflation expectations are falling across “all horizons,” a situation he has previously said would justify broad-based purchases of government bonds and privately held securities.
ECB Executive Board member Benoit Coeure said today that for an ABS-purchase program to reach its full potential, governments must guarantee at least some of the debt.
“Europe is facing a very fundamental choice if it wants to move to an ABS market that is as deep and liquid as the U.S. market,” Coeure said in an interview with Risk magazine distributed by the ECB. “To reach this goal, the securitization market will require a significantly different amount of public sponsoring than is currently the case.”