The European Central Bank (ECB) raised the haircuts for repo lending including ABS assets by four percentage points to 16% from 12%. The new haircuts for ABS lending will be valid as of January 2011.
The announcement follows the tightening of collateral criteria by the ECB already in April this year as well as in November 2009.
UniCredit analysts said that while the additional 4% haircut might seem dramatic, it is not unexpected as the ECB has been keen to begin the withdrawal process and wind down its repo activity for the ABS market.
"The European securitization market is still fragmented in terms of publicly-placed transactions and secondary market trading is still very subdued from a trading volume perspective," said Unicredit analysts. "But as the ECB lending survey revealed, loan origination is also tightening in Europe. Clearly, a strengthening and steady primary ABS market finding its way to public investors in a more liquid ABS market environment could be supportive from a perspective of new loan origination and refinancing."
Repo activity has massively increased during the crisis and in 2010 alone more than €70 billion ($91.3 billion) of new securitization transactions have been issued by originators for the ECB repo program.
However, analysts said that its likely that banks will unload lower rated and non-eligible ABS debt due to the change in haircuts onto the securitization market.