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JPMorgan Sees ECB Buying $53 Billion of Asset-Backed Bonds

ECB President Mario Draghi
ECB President Mario Draghi has been promoting securities backed by loans to SMEs in a bid to increase the supply of credit to Europe’s businesses. Photographer: Martin Leissl/Bloomberg

The European Central Bank will buy as much as 40 billion euros ($53 billion) of asset-backed securities as part of a program to stimulate the region’s economy, according to JPMorgan Chase & Co.

The central bank will limit purchases to the new-issue market over a three-year period and focus on securities with the highest credit ratings, JPMorgan analysts led by Gareth Davies wrote in a note. About 47 billion euros of asset-backed debt has been sold in the region this year, according to data from the New York-based bank.

The ECB is preparing to buy ABS as it strives to revive lending to small-and medium-sized businesses that employ about 70 percent of the European Union’s private-sector workers. While the region’s outstanding ABS market is as large as 1.2 trillion euros, a purchase program of this magnitude would necessitate it being expanded beyond SME-backed loans, the analysts said in the note.

“The purchase plan is important for a number of reasons, but broadly because it puts downward pressure on the cost of issuing ABS, and ultimately feeds into lower product margins on real economy lending,” Davies said by e-mail today.

The Frankfurt-based ECB has hired BlackRock Inc. to provide advice as it thrashes out the final design of its plan, including how much, which assets, and what ranking of bonds it will buy.

‘Broader Definition’

ECB President Mario Draghi has been promoting securities backed by loans to SMEs in a bid to increase the supply of credit to Europe’s businesses. With only 10 billion euros of outstanding bonds, the impact from buying these securities will be small, so the ECB should buy non-corporate assets or encourage new issuance, the analysts said.

“We plump for adoption of a broader definition of asset eligibility, driven by the lack of SME ABS products, even in the good times, but also realise this may present insurmountable presentational issues for the ECB,” the analysts wrote. “Naturally, if SME exposures are the only eligible collateral type, then the ABS purchase program would likely be commensurately smaller.”

Asset-backed securities are bundles of consumer and property loans that are packaged into notes of varying risk and return. The securities allow banks to share the risk of default, thereby encouraging them to offer more credit.

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