Mario Draghi's softly-softly approach is working better than it might seem. The European Central Bank (ECB) president's bid to boost securitisation has produced few new deals, and his purchase programme is small. But the falling cost of issuance is tangible enough, and regulatory hurdles are lifting.
The ECB asset-backed securities (ABS) purchase programme might look like a damp squib. Purchases after three months total euro 4.6 billion. JPMorgan counts euro 16.3 billion of new issues this year, of which euro 10 billion were by UK banks. Where deals are happening, like Dutch mortgages, issuers are selling just the least risky slices of debt. That means securitisation is not being used to free up capital, and so not providing an alternative to bank lending that the ECB wants.
Bankers lament the ECB's caution. It has been acting as a "price taker," rather than using its balance sheet to drive down yields as aggressively as it has with covered bonds or government debt. Some argue that the ECB should be buying riskier, lower-ranking tranches to help banks transfer risk.
Yet there's no denying the ECB has had an impact, even with limited purchases. Top-ranking Dutch mortgage bonds, for example, now pay a similar spread over interbank rates as they did in 2007. The market is still inefficient - issues from southern Europe still pay roughly a 40 basis point premium to Dutch deals - but spreads should fall further, as investors who hold negative or close to zero-yielding government and covered bonds allocate more to asset-backed debt.
More important than price is regulation. The ECB's commitment to securitisation has helped galvanise the European Commission to consider reworking rules that penalise banks and insurers from holding securitised debt. The change in regulation could take years, but progress is happening.
The relatively lacklustre performance of the ABS programme shouldn't be seen as a failure. There would be little logic in the ECB buying truckloads of ABS if regulators drag their feet on reforms, and a market doesn't develop. Buying subordinated tranches would be politically contentious with conservative ECB members. If securitisation is to perform a useful role in the economy, investors' ability to price risk accurately will be paramount - and Draghi's approach makes sense.
