European banks may opt to sell assets, rather than raise additional capital to meet higher capital ratio requirements.
According to a research note from Henderson Global Investors, European banks have an estimated €250 billion ($339 billion) in legacy ABS holdings as part of their “non-core” business areas.
"There is conjecture whether these assets will form part of such asset sales and what the potential market impact will be," analysts said in the note.
However, they said that while the risk of poor timing or short-term market capacity constraints can potentially impact prices, it is unlikely that these banks will flood the market with a deluge of ABS paper.
The report said that the capital requirements for banks is lower than was initially expected and that some of the largest holdings of legacy ABS positions are with U.K. and German banks whose share of the target capital raise is minimal – zero for the U.K. banks and €5 billion in Germany.
Several banks with legacy ABS portfolios have also indicated that they would probably not primarily utilize these assets in any sales.
"To the extent that they do, we expect that the focus will be on very high price assets (minimizing capital loss on sale), and credit distressed, high capital requirement bonds," analysts said. "It is also likely that larger portfolio trades will be privately placed direct to large end buyers, rather than pushed through dealer trading books."
The higher bank capitalization requirements are also likely to keep downward pressure on credit supply, and therefore on securitization issuance volumes because undercapitalized banks are likely to first work on restoring their regulatory ratios without increasing lending activity, according Bank of International Settlements.
"Recapitalization will not translate into greater credit supply until the institutions have strengthened balance sheets," Standard & Poor's analysts said in a report.
To be sure, the market has already experienced these withdrawal symptoms. Eurohypo — one of the largest commercial property lenders in the U.K. and Germany — announced that it has halted new lending. Its parent company Commerzbank is aiming to reduce its balance sheet to comply with the new capital requirements that are rolling out shortly, according to the S&P report.