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The ABS debate

12 November 2015
Richard Kemmish

The real difference between the ECB’s covered bond purchase programme and its ABS purchase programme is that covered bond people complain that the programme is too big, ABS people complain that it is too small. We’d all be a lot happier if the ECB could just rebalance the 10:1 ratio in their purchases so far.

In many ways the intent of the ABS purchase programme feels a bit like the intent of the first covered bond programme. Remember the rhetoric? ”supporting a vital asset class...facilitating the flow of funds into the real economy”. Sound familiar?

Subsequent covered bond programmes have reversed this: we’ve gone from the ECB helping the covered bond market to the covered bond market helping the ECB (to expand its balance sheet as part of QE).
But what is the real point of the ABS purchase programme? Certainly not its ostensible point: quantitative easing – purchases to date represent about 10 basis points of Eurozone GDP, compared to 1% for covered bonds and 3% for the public sector programme.  Hardly likely to lift Europe out of recession.

One argument I’ve heard is that it is a signal. The rehabilitation of the ABS market is complete when the ECB buys them, not just via repos in support of open market operations but via a ‘policy’ portfolio. Again the comparison with the covered bond purchase programme is useful (and has presumably been used in a hundred internal memos explaining why it is now safe for us to invest in ABS again).
Nice idea but there are two fundamental flaws. Firstly the ECB is not the European Commission. The ‘it’s not fair’ complaints have never really been aimed at Frankfurt – lower repo haircuts aren’t such a big deal and it isn’t as if the ECB has said anything particularly unfriendly about the sector. Brussels, on the other hand...

Secondly, as signals go it has been about as effective as the colour of Theseus’ sails. Promising so much and delivering so little the ECB has effectively hoisted a black sail when it was supposed to be white.   

Of course it could also be about quality, not quantity. By aligning their purchases with the outcomes that they want the ECB should be providing a clear economic incentive for issuers to standardise, be transparent, etc.  Why it takes the ECB to provide this incentive, rather than the market is a moot point. Worth pointing out though that whereas the ECB is supportive of the covered bond label, at no point is it a pre-requisite for their purchases.

Both arguments – that it is a signal and that it is a force for market reform – rely on ECB investment as a catalyst for private sector investment. Oddly the exact opposite of the complaints in the covered bond market – that the ECB investment is crowding out private sector investments.
The state of the ABS market and the impact of CMU on it is something that we will be discussing in panel 2 of the forthcoming Euromoney Capital Markets Union Forum in Brussels on 3 December.

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