04 March 2014

FT: Draghi seeks to revive reviled loan bundles to boost credit

Draghi signalled that the ECB could fight deflation and kick-start new lending in the eurozone by buying packages of loans made to households and companies. This would mark a radical departure from the traditional quantitative easing process of buying government bonds.

While Mr Draghi is keen for the more arcane sorts of securitisations to be consigned to history, he believes there is a role for bundles of loans to be repackaged in simpler form to create what is known in investor parlance as plain vanilla asset-backed securities. The ECB president said last month: “We think that a revitalisation of a certain type of [asset-backed security], a so-called plain vanilla [asset-backed security], capable of packaging together loans, bank loans, capable of being rated, priced and traded, would be a very important instrument for revitalising credit flows and for our own monetary policy".

For the eurozone, the advantages of Mr Draghi getting his hands dirty by resuscitating securitisation are clear: the practice has the potential to kick-start lending, which has declined dramatically across the currency bloc. Selling the securities would free up more money for loans to businesses and households, as well as allowing banks to better manage risk on their balance sheet.

The ECB president believes a bigger stumbling block is that regulators do little to distinguish more complex securitisations from simpler, plain vanilla forms. A clear obstacle is that banks must hold more capital against asset-backed securities compared with other products. Yves Mersch, who sits on the ECB’s executive board alongside Mr Draghi, in November complained that the capital charges were akin to “calibrating the price of flood insurance on the experience of New Orleans for a city like Madrid”.

Full article (FT subscription required) 

© Financial Times