At a press conference following the European Central Bank's (ECB) rate decision last week, its President Jean-Claude Trichet said that the ECB is looking to create disincentives for banks who refinance exclusively through the bank.
Trichet said there was a "permanent reflection" on how to address this problem. "This response firmly hints at an ongoing discussion within the Governing Council that might result in a different path of exit than is currently anticipated by the market," wrote Royal Bank of Scotland analysts in a weekly securitization market research report. "We expect further thoughts in this regard over the Dec. 2 meeting, which will also provide further clarity on the 1Q11 liquidity setup."
Trichet's comments also confirmed that the re-ignition of the periphery sovereign sell-off was met by a stepping up of the central bank’s bond purchase program, RBS analysts said.
They added that the stock of retained ABS — senior, repo-able bonds only — is over €300 billion, with Spanish banks accounting for the lion share of this stock.
Retained securitization issuance from the periphery has averaged €25 billion a quarter since the onset of the crisis three years ago, with the deal flow spiking in the six months following the Lehman Brothers fallout and again in recent months.
"The consistency of retained ABS issuance and actual usage of the ECB liquidity facilities suggests to us that retained asset-backed bonds are the assets of choice for most peripheral banks accessing central bank financing," analysts wrote. "Based on data from the relevant central banks, peripheral bank usage of the window stood at just over €360bn as at the end of September 2010."
RBS analysts said that banks are already facing liquidity pressure on the back of the higher haircuts for ABS that the ECB set recently.
Further, peripheral banks in downgraded sovereigns also face the risks that ABS-related ECB liquidity may be "significantly squeezed" under the ECB rules that require 'AAA' ratings at origination. Existing retained ABS also face risks of being downgraded below the minimum 'A-' (dragged lower by sovereign ratings for the most part), which would completely cut-off ECB liquidity for any ABS.
"We see any specific policy change by the ECB to address the liquidity 'addiction' potentially forcing a number of banks into the capital markets for liquidity and/or term funding – from an ABS perspective, the risk is of course that retained deals are ‘leaked’ into the public market," RBS analysts said. "But provided there is no 'firesale' in this regard, we see little disruption to technicals in the generic asset-backed market. Peripheral ABS /RMBS are already trading at distressed levels, isolated largely from the mainstream vanilla securitization market.'