Thursday, December 24, 2009

ECB calls for more clarity in bond market

Posted in the Financial Times by Jennifer Hughes:

Developers of securitised bonds could have to produce far more information about their underlying loans, according to proposals from the European Central Bank.

Asset-backed securitisations, where vast pools of loans are bundled together into new bonds, were a key form of finance for consumer loans from credit cards to mortgages in the years before the financial crisis. But the market froze as the credit crunch began.

The plans, released on Wednesday, are part of the ECB’s efforts to restart the market, considered crucial to the strength of the longer-term economic recovery.

The move also reflects the fact that the ECB has been accepting increasing amounts of securitisations from eurozone banks as collateral and is keen to have more data on the bonds it now holds.

ECB officials believe a large part of the collapse of the ABS markets was because investors lacked enough data to understand the loans underlying their bonds. The market simply froze amid fears their bonds exposed them to the collapse of the US subprime market – though they were unable to verify this.

“As the recent crisis demonstrated, investors did not correctly assess the risks of the underlying asset pools of ABSs and relied too heavily on third-party assessments,” the ECB said on Wednesday. “More transparent and timely information on the underlying loans and their performance, in a standardised format, would help rating agencies and investors.”

ECB officials have been consulting market participants led by José Manuel González-Páramo, a member of its executive board and governing council.

Wednesday’s proposals outlined a system of standardised templates for all deals and a “data-handling infrastructure” through which data would be made available to investors.

Several deals in recent months have signalled a tentative reopening of the market, but its future is far from assured and it is not expected to recover to pre-crisis levels. Before it seized up, investors were split almost equally between long-term fund managers, off-balance sheet vehicles and banks’ treasury operations. Of those, the off-balance sheet sector is considered dead and banks are shrinking their balance sheets, meaning they will have less appetite to invest.

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