The European Central Bank announced today that it will start purchasing asset-backed securities and covered bonds in October in an effort to increase liquidity in the financial system and stimulate economic growth.
ECB President Mario Draghi said that the Eurosystem would purchase “a broad portfolio of simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector.”
The ECB also lowered three key interest rates.
The announcement comes after central bank hired BlackRock, the world’s biggest money manager, in August to advise on developing a program to buy asset-backed securities.
No further details were announced, though Reuters has reported that the two programs could purchase up to 500 billion of assets and have a duration of three years.
Purchasing securitizations of loans to small and medium-sized companies is expected to boost bank lending in this sector. However the Prime Collateralized Securities (PCS), a European securitization trade group said in a press release today that details on how the program is modeled would determine its success in revitalizing the private label securitization market.
“Much, of course, will depend on the actual size and, more crucially, the terms of the purchase program,” stated the PCS.” In particular, whether it will target only senior tranches and how it will define high quality”.
If the ECB, for example, targets only ABS backed by the existing pool of SME debt it would limit the impact of its asset purchase program. Market analysts believe that expanding purchases to securitizations backed by residential mortgages and debt backed by consumer loans would broaden the loans available for purchase and have a more meaningful impact on reviving private label securitization market.