European banks will likely reprise their former role as major RMBS buyers if the asset class becomes eligible for Basel liquidity requirements, as proposed in the CRD IV implementation draft put out by European Commission, according to analysts at RBS in their weekly ABS report.

The European Banking Authority is due to a make the final decision on whether RMBS will indeed be included by mid 2013. “Any such ultimate inclusion will significantly deepen the buyer base for such asset-backed bonds as bank liquidity books are re-incentivized to invest in the asset class directly,” the analysts said.

They added that this was the first time that RMBS has been mentioned explicitly for potential inclusion. In fact, the initial draft for liquidity-eligible purposes put out in 2009 explicitly ruled out securitizations. 

Banks have shaved down their ABS holdings since 2007 due to deleveraging pressures in general and disfavor towards securitizations in particular. RBS analysts pointed out that before 2007 banks and and their off-balance sheet vehicles (SIVs, conduits, etc.) accounted for as much as 85% of the ABS buyer base. That figure is now about 40% (see chart below).

Lately only banks from the US have been active buyers of European securitizations recently. More favorable regulatory treatment for European banks to hold RMBS could change that.

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