Securitized banking continues to be under stress in Europe, as can be seen in two unrelated news reports from Financial News on May 6 that show it is getting harder for some financial institutions to raise cash in Europe.
In one report, firms holding Irish debt are finding it much more costly to use that debt as collateral for repo loans, because repo lenders are demanding extra collateral. Similar squeezes have been occurring with Greek and Portugese debt.
In a second report, financial institutions that securitize are still having trouble finding investors to buy asset-backed securities, so they’re holding the securities themselves and using them as collateral for repo loans from the European Central Bank, which doesn’t want them.
Securitized banking, where institutions borrow on the repurchase market and use the money to finance much of their securities portfolio and their business of securitizing loans, was the key market that collapsed in 2008, causing the credit crisis and the U.S. taxpayer bailout of the giant banks.
Problems in this arena are of concern to economists who see securitized banking as critical to economic growth.
But other economists would like to replace securitization with simple bank lending, because they believe securitization is too complex and opaque, and some would like to eliminate collateralized lending entirely, believing it gives lenders a false feeling of security and lulls them into ignoring risk.
In the first report, The Financial News said a firm that wants to use Irish Treasury bonds as collateral for $100 million in repo loans will have to put up $150 million of the Irish bonds:
The amount of collateral needed to trade Irish Treasury bonds has increased to over 50 percent for the first time, as fears over the eurozone sovereign debt crisis continue.
The clearing house LCH.Clearnet increased the margin requirements needed to trade Irish debt from 45 percent to 55 percent. Margin requirements have been steadily increasing since November last year, when requirements were just 10 percent. …
The move by LCH.Clearnet makes it increasingly expensive to trade Irish debt, but the steady increase in margin requirements has not stopped all asset managers continuing to trade the bonds. …
According to data from Thomson Reuters, French insurer CNP Assurances is the largest holder of Irish debt among institutional investors as of 31 December 2010, holding $1.37bn. Boston-based fund manager Loomis Sayles and French asset manager Covéa Finance also hold over $1bn in Irish sovereign debt.
The margin requirement on Portuguese government debt was raised to 45 percent May 11.
By comparison, the margin that dealers are paying on the U.S. tri-party repo market for U.S. Treasuries is 2 percent, according to the Federal Reserve Bank of New York. In the U.S. tri-party repo market, JP Morgan Chase and Bank of New York Mellon serve a middlemen clearing banks for the transactions.
In a second report, The Financial News said investors burned by the financial crisis are not yet returning to the market for securitized loans.
Asset-backed securities became the most commonly used form of collateral placed at the European Central Bank last year, suggesting that banks are struggling to sell these securitised products to investors and are still relying on the ECB for funding.
According to the central bank’s 2010 annual report, published on Sunday, ABS accounted for almost a quarter of assets posted with the central bank last year. ABS comprised some 24% of collateral, compared with 23% in 2009. …
The ECB has tried to discourage issuers from posting asset-backed securities, which were widely blamed for magnifying the impact of the US housing collapse, as collateral in the past year by introducing more stringent provisions for eligibility. But issuers have shrugged off these attempts and remain reliant on the central bank. …
Just 40% of the pre-crisis ABS investor base remains active in the market, according to analysts at Citigroup, equating to a capacity constraint of around €190bn of new issuance per annum.
With the secondary market reduced to a trickle, issuance for obtaining ECB funding has become the ABS norm, and of some €398bn of ABS created last year, €308bn was retained by issuers. Of the €115bn of issuance so far this year, around €84bn has been retained.
A large portion of the retained ABS is then posted at the ECB for funding – a process known as repo funding. …
Europe’s banks remain heavily dependent on ECB funding, with Irish, Greek and Portuguese institutions almost entirely focused on the central bank. …
With regulatory capital requirements for securitisations yet to be finalised … investors are unlikely any time soon to return en masse.
RepoWatch appreciates the coverage that UK journalists at the Financial News and the Financial Times give the repurchase market and hopes U.S. journalists will also start tracking repos.