ECB FACES TOUGH TASK TO REVIVE SECURITIZATION / THE WALL STREET JOURNAL

Heard on the Street

ECB Faces Tough Task to Revive Securitization

Central bank’s asset-backed securities purchases have proved underwhelming so far

By Richard Barley

March 20, 2015 8:41 a.m. ET

The European Central Bank’s new headquarters in Frankfurt. The ECB started buying asset-backed securities late last year. Photo: European Pressphoto Agency


The European Central Bank’s power to steer markets is undeniable—just look at the euro or eurozone-government-bond yields. But it is finding it trickier to get a grip on purchases of asset-backed securities. The ECB’s efforts to revitalize Europe’s securitization market are falling short of its rhetoric.

The ECB started buying asset-backed securities—which bundle together pools of underlying loans—in late November. But as of March 13, it had bought just €3.8 billion ($4.1 billion) of these securities. By contrast, the ECB bought €9.8 billion of government and public-sector bonds in the first three days of its expanded asset-purchase program. Purchases of securitizations were never going to be the driving force behind expanding the ECB balance sheet, of course, but the result is still disappointing.

Both internal and external factors are at play here. First, the purchase program itself is somewhat cumbersome. The ECB makes use of four external asset managers to suggest potential purchases. But the due diligence required and the time taken for the ECB to decide on whether to buy a security means that actual purchases are a slow process. The system might yet be streamlined. At some point national central banks will take over the purchases, but it hasn’t yet been decided when that will happen.

Second, there has been relatively little new issuance of securitizations, which might provide better opportunities for purchases. One concern is that the massive provision of liquidity by the ECB through other channels, such as long-term loans, means that banks have no incentive to turn to securitization, as funding is plentiful and cheap. In the first two months of the year, securitizations placed with investors totaled €7.6 billion, according to Barclays, the slowest start to a year since 2009.

Third, the regulatory treatment of asset-backed securities is in flux and is still deterring both issuers and investors. A key attraction of securitization for issuers is the ability to transfer risk to investors, freeing up capital, but regulation has made this difficult. This isn't the ECB’s fault but does emphasize that the central bank cannot do everything on its own—as it has made clear on monetary policy more generally.

Part of the problem may be that the ECB’s asset-backed securities program has to serve two ends. It is part of monetary-policy operations, but has an aim beyond that to develop a durable market that could help fund Europe’s small businesses better in future. That creates conflicts: a program to get the market back on its feet might work much better if it was aimed at helping banks transfer risk by buying lower-rated slices of securitizations; as a monetary policy operation the ECB is focused on low-credit risk securities.

The hope remains that a brighter eurozone outlook, greater borrowing and lending and regulatory compromise could yet lift issuance of asset-backed securities. But for now, the market appears beyond the reach of even the long arm of the ECB.