Wednesday, March 3, 2010

Securitization market revival seen as crucial

Posted in the Financial Times by Jennifer Hughes, David Oakley, Aline van Duyn and Michael MacKenzie:

At a structured products conference this week in London, the first item on the agenda summed up the market debate: “What will it take to get securitisation going again?”

That question is not just of interest for the industry. The re-opening of those markets is a key plank in central bank exit plans around the world as they seek to offload the assets they took on during the crisis.

This is not only asset-backed securities – although these total hundreds of billions in any leading currency – but even larger holdings of straightforward government bonds. How these securities are returned to private hands is crucial for the future of the financial markets.

It is also key to the outlook for the wider economy. Get the exit wrong, and central banks risk driving yields on government bonds sharply higher – raising government funding costs and lifting those of other, linked assets such as corporate bonds, which could limit business recovery. Markets are already worried that without the artificial support of central bank buying, yields will rise sharply anyway as governments continue their record borrowing without this backstop.

“There is a danger that bond yields will rise sharply in certain countries as investors worry about the health of the markets without the artificial support of the central banks,” said Gary Jenkins, head of fixed income research at Evolution.

Even if central bankers get that right, they face a potentially even tougher task in re-starting the securitisation markets, where bundles of consumer and other loans are repackaged into new securities. Responsible for funding sizeable chunks of consumer credit before the crisis – more than half in the US, for example – bankers and regulators know that kick-starting the market is key to a sustainable economic recovery, but so far, private markets have only shown tentative signs of returning.

Central bank holdings are a mix of outright acquisitions – buying bonds to funnel extra cash into the banking system – and term loans, where they offered cheap cash against a range of collateral that will need to be repaid by the borrowers.

In the case of the Bank of England, it owns just under £200bn ($300bn) in government bonds – 20 per cent of outstanding stock – and lent £185bn against asset-backed securities through its special liquidity scheme. To put the securitisation challenge in perspective, new asset-backed issuance has totalled about £10bn in the past six months across Europe. For banks to find the funding through the securitisation markets to repay £185bn by the 2012 deadline requires issuing about £8bn a month from here.

The European Central Bank put together new schemes, such as pledging to buy about €60bn in covered bonds – a form of high-quality bank debt – and extended what it would take as collateral in its existing lending facilities. Figures on exactly what it holds in terms of securitisations are not completely clear, but analysts at JP Morgan believe European banks have created about €1,500bn of securities that they couldn’t sell into the market and although not all of that will have been placed in Frankfurt as collateral, much of it will have been.

In the US, the Federal Reserve will hold about $1,700bn in government and mortgage-related bonds by the end of the month.

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