The European Central Bank (ECB) wants to revive the market for asset-backed securities (ABS), and a holistic approach from EU policymakers, as well as more clarity from rating agencies, could help this happen, one of its board members has said.
Yves Mersch, a member of the ECB’s executive board, said: “A holistic and coordinated approach among EU policymakers, as well as greater standardisation and more methodological transparency by rating agencies, could help encourage the revival of the ABS market we all want to see.”
Speaking at the IMN Global ABS Conference in Barcelona, he said much work was already going on to improve the environment for ABS issuance, and he was trying to outline practical steps to take that work forward.
Despite their growing use, ABS – interest-bearing securities based on pools of a wide variety of illiquid assets such as credit-card or car loans – still attract controversy because of the role their sudden demise played in the credit crunch and resulting global financial crisis of 2007-08.
But Mersch said: “There is a growing consensus that an instrument once seen as part of the problem could in fact be part of the solution.”
Over the last year, he said ABS had become a major focus of discussion in European policymaking circles.
The main reason the ECB wanted to revive the ABS market was that the securities were a means to an end – achieving the central bank’s primary goal of price stability, he said.
“ABS provide a channel for the funds of liquidity-rich bank or non-bank investors to reach the real economy, in particular its more opaque segments,” said Mersch.
“By stimulating further credit creation, which in turn feeds into consumer prices, this supports the transmission of monetary policy and the fulfilment of our mandate.”
However, he said the ECB also took a keen interest in the securities because they made up such a large proportion of the euro system’s own balance sheet, he said.
At the end of March, €307bn of ABS collateral was pledged, which amounted to 15% of total pledged collateral for euro-system operations.
“If a counterparty were to default on its obligations, the euro system would gain ownership of this ABS collateral and then seek to liquidate it in secondary ABS markets without incurring a loss,” he said.
His first proposal to revive the EU ABS markets was for their regulatory treatment to become more holistic.
“There is still a sense that the regulatory agenda is proceeding in an uncoordinated manner,” said Mersch.
His second proposal was to introduce more stringent transparency and standardisation for ABS products, which would give market participants greater means to verify data that issuers gave and exert market discipline.
Third, rating agencies should be more transparent in how they come up with their ratings on such securities, and should publish the ratings without the cap that related to the sovereign debt rating of the issuer’s country.
Mersch questioned whether that cap was appropriate, since data suggested that many of the systemic risks used to justify the country ceiling approach were distant.