10 October 2014

Bruegel: The ECB’s ABC of ABS is missing a few letters

There was still no figure quoted for the programme. Draghi reiterated his September point saying that it is hard to give a figure because there are several interactions between ABS purchases, Covered Bond purchases and the TLTRO. He insisted that the overall impact should be such as to bring the ECB’s balance sheet back to the size it had at the beginning of 2012. Draghi was rather vague about whether the TLTRO and ABS programme are mutually reinforcing or rather conflicting with each other in banks’ eyes (something I previously addressed here).

Further measures are not ruled out. At the eve of the meeting, pressure had been mounting for the ECB to “do more” on the back of weak data. Perhaps in the attempt to counteract the scepticism that seemed to be growing after the disappointment of the first TLTRO auction, Draghi spelled out somewhat more clearly than usual that “despite the measures already taken, the Governing Council still stands ready to take additional measures”. This – by now, usual – statement, is hardly an indication that a full QE should be expected in a near future, considering how much reputational capital the ECB has put at stake in marketing the TLTRO and ABS programmes over the past months.

Details on the ABS and Covered bond programme (CBPP3) were unveiled. In both cases, purchases will be conducted in both primary and secondary markets, as it was the case for the two previous CBPP.

The third Covered Bond Programme (CBPP3) differs significantly from the two previous waves, and the ECB has evidently tried to make it look more open-ended. No target amount was revealed on announcement; there is no eligibility requirement related to the issue volume of a covered bond (it needed to be 300 million during the second and no less than 100 million during the first programmes); there is no maximum residual maturity on covered bonds accepted and fully retained securities are eligible. Purchases of covered bonds will start in mid October 2014 that – as we already pointed out in a paper and a post – is a tricky timing. Banks will in fact have to deal with the aftermath of the ECB’s supervisory assessment – including but not limited to possible capital needs identified. The ECB’s involvement in the business of buying banks’ bonds could put the Central Bank in an uncomfortable position and raise questions of incompatibility with the supervisory function that is carried out by the same institution – although supposedly behind Chinese walls.

Concerning the ABS Purchase Programme (ABSPP), the programme will last for at least 2 years and both senior and guaranteed mezzanine tranches of asset-backed securities (ABSs) will be purchased. This is something that ECB’s President Draghi has been strongly fighting for in recent weeks, but the most important detail – i.e. the eligibility criteria for guaranteed mezzanine tranches of ABSs – has not been disclosed yet. This most likely signals that ECB has not yet found the way around the opposition it faces on this politically (highly) sensitive point. The purchases of ABS will however not start until the fourth quarter of 2014.

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