11 June 2014

ECB/Mersch: Next steps for European securitisation markets

"As you may know, in recent months the ECB has put a great deal of public focus on reviving the European ABS market. Why are we so interested in this particular market segment? There are three parts to the answer: price stability, financial stability, and the stability of our balance sheet.

First, and most importantly, we see ABS as a means to an end, and that end is achieving our primary objective of price stability. 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. 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. This mechanism is useful at any stage of the cycle, but especially in an environment of low interest rates and low inflation as we see today. It is in this context that the Governing Council decided last week to intensify preparatory work related to outright purchases in the ABS market.

The second reason for our interest in ABS is their potential financial stability role. Of course, we know that overly-complex and opaque ABS, particularly in the US, contributed to the financial instability witnessed in 2007 and 2008. But as I have long argued, alongside other policymakers, simple and transparent instruments can spread well-understood risk across different financial actors and hence play a stabilising role. As ABS can be customised, for example in terms of asset exposure, geography, and maturity, they can satisfy the needs of most non-bank investors, whether a pension fund, an insurer, or an asset manager.

Finally, the ECB takes a close interest in ABS because they are an important component of the Eurosystem’s own balance sheet. As of the end of March this year, 307 billion of ABS collateral was pledged, amounting to 15 per cent of the total pledged collateral for Eurosystem operations.

Proposals to unblock European ABS markets:

1. My first proposal to revive EU ABS markets is to find a more holistic approach to their regulatory treatment. The focus on discrete issues is causing us to miss their continuous dimension. One might reasonably argue that coordinating such an approach would be challenging, that deadlines are fixed by legislation, and that it is difficult to coordinate simultaneously at the global, EU, and national levels – especially given the different mandates and scope of the various parties involved in regulation. However, I believe all of the actors are present and pieces in place to go down this route.
2. My second proposal concerns transparency and standardisation requirements for ABS products. I wholeheartedly support disclosure for ABS. This is because ABS will always have the potential to be highly complex, which implies much more room for opacity than other standard financial products. Looking forward, I believe that greater standardisation of ABS products is a key goal to stimulate greater market activity.
3. My third proposal relates to the treatment of European ABS by credit ratings agencies. Currently many ABS in stressed economies are constrained by the rating of the corresponding sovereign. The rationale put forward by rating agencies is that there are immitigable risks that affect all issuers and assets in a particular country, above all the sovereign. As regards calibration, some quantitative and many qualitative factors are taken into account by the agencies when setting this ceiling. Yet, I question whether this ceiling is appropriate."

Full speech

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