The European Central Bank (ECB) may spend up to 800 billion ($1 trillion) on securitizations, covered bonds, and financial aid for banks in its upcoming stimulus measures, according to several market reports.
The size of the purchase program is key to its success. The ECB’s past covered bond purchase program “speak to the difficulties in executing viable purchase strategies of any magnitude,” stated Deutsche Bank analysts in a report Monday. In 2009 and 2010, under CPPB1 the ECB bought 60 billion of covered bonds in an effort to revive the market. In October 2011, under CPPB 2 the ECB purchased 14 billion out of a 40 billion target.
“Despite some tightening in spreads and an initial jump in issuance, these programs did not engender a lasting increase in covered bond issuance to pre-crisis levels, with issuance falling back during 2013,” explained Moody's Investors Service in a report published Monday.
The chart below shows the limited impact past covered bond program had on issuance.
The ECB’s ABS purchase program (ABSPP) and a new covered bond purchase program (CBPP 3) are slated to start in October 2014 with operational details to be disclosed on October 2.ABSPP will target a broad portfolio that includes RMBS and other securitizations backed by loans to the real economy. The purchases will include new issue and secondary markets and will be senior only in focus. Mezzanine bonds can be purchased but only if they benefit from a guarantee.
The purchase programs are designed to facilitate new credit flows to the real economy, and to strengthen banks’ funding positions, while kick-starting securitization markets.
Moody's stated in its report, that it will take “considerable time for purchases of asset-backed securities to engender significant alternative credit flows”.
Over the longer-term the programs could provide significant support to euro area businesses. "Banks could originate and securitize new loans, and then sell the securities on to the ECB or other buyers, boosting credit provision," noted Colin Ellis, Chief Credit Officer for EMEA, in the report.
