ECB’s Coeure Says ABS Push May Fail Unless States Back Debt

The European Central Bank’s efforts to restart the region’s ailing securitization industry may fall short unless governments step in and guarantee at least some of the debt, Executive Board member Benoit Coeure said.

“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 today. “To reach this goal, the securitization market will require a significantly different amount of public sponsoring than is currently the case.”

ECB President Mario Draghi said in June that the central bank was intensifying preparations to purchase asset-backed securities in an effort to revitalize the $1.9 trillion market that has contracted 34 percent since 2009. While the ECB has said it’s ready to use its own balance sheet, the European Union and national governments so far have shown no willingness to help coax investors back to the asset class.

“This is obviously not a decision that falls under the remit of the ECB because this is not our money and, at the end of the day, it’s shifting risk to public balance sheets, so it has to be a political decision,” Coeure said.

The ECB’s efforts in the ABS field are taking a two-track approach, with purchases in the existing market possible both as part of a large-scale quantitative-easing program to fend off deflation, and as the focus of a smaller, targeted plan similar to a previous venture into covered bonds.

Financial Crisis

Current regulation regarding ABS could be seen as “unduly conservative,” Coeure said, referring to higher capital charges on the asset class that were spurred by the financial crisis.

While ABS have been viewed since then as a higher-risk asset class, policy makers are underlining that European instruments have performed relatively well.

Less than 1.6 percent of the 2.8 trillion euros 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.

“There is some work to be done on the regulatory side to make the capital -- in particular the capital treatment of securitization for both banks and insurers -- reflect the underlying risk properties of ABSs,” Coeure said. “The current state of the proposals does not reflect the underlying risk for mortgages specifically, as reflected in the default rate on European securitizations.”

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