Barclays Capital have done something clever.
They’ve used banks’ retained covered bonds and asset-backed securities — that is, loans that have been converted into ABS or covered bonds, but kept on the banks’ balance sheets — as a gauge for which financials could be using central bank funding facilities the most.
So instead of just a regional breakdown (which we’ve seen ad nauseum) we get a bank-by-bank estimate for who’s tapping European Central Bank, or Bank of England, largesse.
The reasoning is that covered bonds and ABS not sold off into the wider market are probably being hoarded as possible collateral for central bank funding. As BarCap put it, the ABS and covered bonds could tell us the size of the ‘overdraft’ that banks are running at either the BoE or ECB. Although they could also just be telling us how much banks are putting aside as ‘just in case’ collateral. Either way though, it’s interesting.
Without further ado, then, here’s the chart:
As with the regional breakdown, it looks like Greek banks (Alpha and NBG) have been hoarding the most ECB collateral in 2010. But in 2008, that honour went to Spain’s BankInter and the UK’s Lloyds Banking Group. In 2009, quite a few Italian banks were heavy users, as well as Norway’s DnBNor.
So far, so expected. But with the ECB’s 12-month Long-Term Refinancing Operation (LTRO) set to expire on July 1, attention has turned to just how reliant these financials are on central bank funding. The ECB’s €60bn covered bond-buying programme is also expiring at the end of this month.
Here’s what the BarCap analysts, led by Simon Samuels and Mike Harrison, say:
Among euro area banks, Spanish, Irish and some Italian banks have retained the most ABS and covered bonds since 2007. If demand for ECB funding positively surprises the market reaction is obvious. However, if demand negatively surprises, the picture is a bit more nuanced: the market broadly understands that peripheral European countries are facing funding problems – but increased demand for ECB monies may mean that banks outside this group are also becoming increasingly reliant on central bank financing (although it will not be before August that this would be shown in the official data).
As a side note, the marketing of ABS to the ECB has become a rather fascinating exercise in bank ingenuity. For instance, the process of arbitraging between European national central banks.
ABS eligibility as ECB collateral is evaluated by the central bank of the country where the securities are listed. And these central banks often have varying ideas on what’s eligible or not — something financials have been quick to recognise and exploit; moving assets between countries for the best result.
To be fair, central banks now seem to be cracking down on this kind of thing. They’re organising themselves to ensure consistency in applying ABS eligibility rules, valuation etc. We hear from law firm Clifford Chance, for instance, that the French central bank is now charged with determining prices for hard-to-value assets.
But there’s also the possibility of some securitisation shenanigans.
For instance, if you have an ABS rated lower than AAA, and therefore not eligible as ECB collateral, you might try to restructure it as something else — a covered bond, for instance. Corporate bonds and covered bonds need only an A rating to be eligible.
In other words, those retained ABS and CB figures are interesting — but they may just be the tip of a securitised bank overdraft iceberg.
Related links:
Banks in fresh move to unlock loan pool – FT
Eternal sunshine of the securitisation mind – FT Alphaville
Collapsed debt market poses dilemma for G20 leaders - Gillian Tett, FT
Moving mountains, rebuilding markets – FT Alphaville