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Summary of "Asset-Backed Securities: The Key to Unlocking Europe's Credit Markets?" by Carlo Altomonte and Patrizia Bussoli (July 2014)

Core Content

This document explores the potential of asset-backed securities (ABS) to revitalise Europe's credit markets and improve the transmission of monetary policy, particularly through the European Central Bank (ECB) intervention. It outlines the current state of the European ABS market, the challenges it faces, and the options available for the ECB to support its revival.

Main Views

• The European ABS market has significantly contracted since the 2008 financial crisis, with total new issuance dropping from €1.2 trillion in 2008 to €239 billion in 2013.
• The market is currently estimated to have an outstanding amount of around €1 trillion, with roughly half being actively traded.
• The ECB's potential direct intervention in the ABS market could have both direct and indirect effects on credit availability. However, the impact would depend on the type of ABS targeted, the timing of the intervention, and the regulatory environment.

Key Information

1. Current State of the ABS Market

• Market Size: Total new issuance in the euro area in 2013 was €239 billion, down from €1.2 trillion in 2008.
• Outstanding Amount: At the end of 2013, the outstanding amount of European securitisation was approximately €1 trillion.
• Collateral Types:
  • Mortgage-backed securities (RMBS) and standard ABS (car loans, leases, etc.) make up the majority of the market.
  • SME ABS and CDOs have seen the most significant decline in issuance.
• Rating: About 77% of the outstanding ABS are rated above BBB, making them eligible for use as collateral by the ECB.
• Market Liquidity: Only about 10% of new ABS issuance is placed on the market, indicating a lack of demand and liquidity.

2. Potential for Market Growth

• The estimated total potential for the euro area ABS market, if fully revitalised, is around €3 trillion.
• This includes:
  • RMBS: €601 billion
  • SME ABS: €102 billion
  • Large NFC ABS: €150 billion
• The ECB could play a key role in reviving the market by purchasing eligible ABS products, which could increase liquidity and encourage more credit origination.

3. ECB's Options for Intervention

Option 1: Act Small and Fast

• Description: Purchase of existing "plain vanilla" ABS products, particularly those backed by SME loans.
• Market Volume: Estimated at €68 billion (€102 billion for SME ABS and €15 billion for lease ABS).
• Impact:
  • Limited direct effect due to the small size of the market.
  • Could have indirect benefits by freeing up capital on banks' balance sheets, allowing them to access the ECB's Targeted Longer-Term Refinancing Operation (TLTR0) more effectively.
• Conclusion: A viable option to start the process of market revival, but likely to have limited impact on credit conditions.

Option 2: Act Large and Slow

• Description: Reviving, deepening, and integrating the ABS market to make it a more robust tool for non-conventional monetary policy.
• Regulatory Considerations:
  • Post-crisis regulations have made ABS issuance more capital-intensive.
  • Regulatory changes are needed to standardise the market, but they require time.
• Potential Impact:
  • Could lead to a more substantial revival of the market, with the potential to reach up to €1.6 trillion if the market is revitalised.
  • May involve purchasing residential mortgage-backed securities (RMBS), which could be a large and immediate intervention.

4. Regulatory and Structural Challenges

• The ECB's intervention in the ABS market must consider the heterogeneity of the market, including:
  • Different lending criteria across countries.
  • Variations in rating methodologies.
  • National differences in default law.
• These differences create inefficiencies and uncertainties in the market, which could be mitigated through regulatory harmonisation.
• The ECB could also consider purchasing RMBS, but this would have elements that overlap with fiscal policy, requiring careful consideration.

5. Conclusion

• A revitalised ABS market could help unlock credit markets in the euro area and improve the transmission of monetary policy.
• The ECB should consider both immediate and long-term strategies, with the potential for a combination of regulatory reform and direct market intervention.
• The choice of which ABS to target will depend on the regulatory environment, the ECB's objectives, and the current state of the market.