ABS are bundles of loans, split into various tranches to suit different risk profiles, that are sold to investors. Banks use this securitisation process to dilute risk on their balance sheets – for example, by hiving off surplus assets – and also as a funding tool. Mario Draghi, president of the European Central Bank, has been key to changing how investors view ABS, once labelled “toxic sludge”. ECB officials have been increasingly vocal in calling for a revival of the ABS market to stimulate economic growth. This month Mr Draghi announced proposals to buy “high quality” ABS to unblock lending to credit-starved small and medium businesses, which provide the bulk of eurozone employment.“We were part of the problem, now we’re part of the solution ,” says one ABS trader, summing up the new mood.
In spite of the rhetorical uplift, though, the market is still in the doldrums. Since 2010 less than €100bn of ABS has been issued in the open market annually. This is less than half the average amount in the pre-boom years between 2001-2004 and well down on the €477.6bn peak achieved in 2006, according to the Association for Financial Markets in Europe. Total issuance in 2013 was €181bn, a year-on-year fall of 28 per cent. However, only €76.4bn was placed with investors on the open market. The majority was used by banks as collateral to access ECB funding.
Most analysts think the market has bottomed out and expect issuance to rise, notwithstanding low economic growth and what some analysts have criticised as muddle-headed regulation. Regimes such as Basel III and Solvency II propose to regulate ABS for banks differently than for insurers.
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