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ECB buys securitisations, a good signal

Ruben van Leeuwen, Senior ABS Analyst

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Interview with Ruben van Leeuwen, senior ABS analyst at the Rabobank, by Jan Aikens of Findinet.nl

The ECB’s purchase programme for securitisations is “a good signal for the market”, according to Ruben van Leeuwen, senior ABS analyst at the Rabobank.

ECB’s general monetary policy has however been given more media attention, primarily because of the quantitative easing policy, which is about to commence on a larger scale. “Policy rates are close to zero, so the European Bank cannot do much else to fight the dangers of deflation”, according to Van Leeuwen.

“This is not the first time ECB purchases securities such as these. In fact, it has happened twice before for covered bonds. However, the ECB has never purchased these securities on this scale in the past. Emphasis has been placed, almost completely, on purchasing government bonds these days”, Van Leeuwen continues, “some may not have noticed that the ECB is already buying asset-backed securities since November last year.

He thinks this is a shame, for several reasons: “For this part of the financial market, a signal function is seen, because ECB shows interest in these products. It could work as an accelerator for new emissions in this segment, which currently suffers from stagnation. The securitisations are of a good quality, otherwise the ECB would not have been interested in them.”

What does ECB look for?

“The structures within the packages should be as simple as possible. A large complexity is simply not permitted. Furthermore, its value needs to be covered by loans that actually arrive in the economy. Those loans always need to be transparent. The Dutch mortgage packages meet those requirements. Most transactions are up to the standards set by ECB and transparent.”

Which are not?

“Then we will have to talk about some selective securitisations from before the crisis, when several parties were focusing primarily on higher risk loans. There are still a few Dutch securitisations outstanding that include these loans.

If it becomes widely known that ECB has this approach, will this stimulate new emissions?

“Banks and other lenders are all aware of the purchase programme for securitisations. Inducing more supply of new securitisations will be the key for success. Currently, ECB primarily purchased securitisations in secondary markets. This has already caused a substantial drop in credit spreads and therefore funding costs. Perhaps these developments will eventually result in new emissions, but it will definitely be a long-term matter. I do not see it happening any time soon. Besides that, securitisations were not particularly popular in recent years. Even though securitisations are cheaper to issue than before, they remain more expensive compared to other funding instruments. Nonetheless, the lower credit spreads on these instruments is one of the reasons why Dutch mortgages are decreasing currently. There is thus an effect of the purchase programmes by the central bank on the Dutch mortgages market.

Some international investors think that lending standards on the Dutch mortgage market are not in line with other countries. Does this influence the marketability of these packages?

“It is true that both our collective and individual mortgages debts are very high from an international point of view.” Van Leeuwen admits. “This had its influence during the crisis, although less for the specific Dutch situation. The main reason why securitisation has been widely blamed, was the negative perception from US (subprime) securitisation that transferred to Europe.

Also internationally, the quality of Dutch loans was examined. Even though you can place several critical notes such as a the higher debt, selling houses at a loss et cetera, the fact of the matter is that The Netherlands has a loss ratio of only 0.1%, which is very low compared to other countries. Theoretically, if the amount that is not paid back on a loan would double, the risk is still very low. Most foreign investors know this all to well.

Referring back to the European purchase programme, Ruben van Leeuwen calls the initiative of the ECB “a step in the right direction. It will take roughly one year to see the its effect and we will see then whether or not the securitisation market can stand on its own feet again.” Van Leeuwen does add: “A purchase programme that is too ambitious, may result in the ECB aggressively bidding for allocations, which may leave little for other parties. Also the question arises if there will be enough space left for a liquid market, as the central bank holds the assets until maturity. It would be wise if the bank indeed leaves room for other investors. They are aware of this, as the ECB bank has explicitly stated it does not want to crowd out other investors.

 

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