A multi-billion euro attempt by the European Central Bank to revive the market in securitized debt has fallen flat, highlighting the bank’s struggle to boost stubbornly low levels of lending in the euro area.
In 2014, ECB President Mario Draghi identified the securitization market as a crucial way to boost eurozone lending. That year the ECB launched a program to buy up asset-backed securities, which bundle loans and mortgages into new debt, as part of measures aimed at injecting around EUR1 trillion into the eurozone’s financial system.
But in 2015, sales of new European ABS were roughly flat and the cost of issuing securitized debt in southern Europe actually increased.
This attempt to revive a type of debt that was at the heart of the subprime crisis is floundering partly because of the regulation placed on banks and insurers in the aftermath of that period.
The ECB is also struggling to boost such capital markets because they were always just much smaller and more fragmented than those in the U.S.
But for the ECB, the lackluster results point to the difficulties it faces in stimulating lending to the economy.
“We’re not seeing credit growth taking off as in a normal recovery,” said Anatoli Annenkov, a senior economist at Société Générale. “A year ago we were more hopeful the ABS program would have an impact, buts it’s clear this has become a very minor thing.”
Securitization allows banks to package together assets such as loans and mortgages and sell them to investors, freeing up space on their balance sheet to lend more money.
That is particularly important in Europe, where companies are still heavily reliant on banks, as opposed to public markets, to raise money
“We are a bank-based economy,” Mr. Draghi said in 2014.
Central banks want companies to borrow more so that they invest. In one sign that the ECB’s recent measures have yet to take off, investment growth in the eurozone is trailing that in the U.S. during its economic recovery.
In one measure of how much businesses are investing, investment in equipment in the euro area was projected to grow by 4.6% in 2015 compared with the previous year, and a further 4.6% in 2016, according to the European Commission’s last forecast, in Autumn.
That compares unfavorably to U.S. equipment investment in periods after the Federal Reserve had been buying bonds. It grew 10.3% in 2011 and 8.8% in 2012, for instance.
Analysts say the U.S. ABS market benefited from the Fed’s bond-buying program, which bought up large amounts of agency mortgage-backed securities.
U.S. ABS have made a stronger comeback from the financial crisis that many people still blame these securities for causing. While new U.S. ABS issuance is still down on its precrisis peak, it grew 12% in 2015 from the year before, according to trade groups the Association for Financial Markets in Europe and the Securities Industry and Financial Markets Association.
The overall size of the U.S. ABS market is set to expand by 26% to around $8.8 billion worth (EUR8.1 billion) in the third quarter of 2015 from its recent low in 2013, according to AFME and Sifma.
Despite the ECB’s efforts, the overall size of the European ABS market was on track to decline for a seventh straight year in 2015.
“There was initial euphoria until the program started,” said Edward Panek, head of ABS investment at Henderson Global Investors. “It has had a very limited impact.”
Some analysts and investors have criticized the ECB’s approach and the glacial pace of its purchases.
The ECB’s buying program has been modest, with only EUR16 billion of ABS bought as of Jan. 22, or around 7% of the market eligible for such purchases, according to Gareth Davies, a strategist at J.P. Morgan Chase & Co.
In comparison, its government and quasi-sovereign bond-buying program grew to EUR530 billion after being launched in March 2015.
Investors have also criticized the ECB for buying too many securities in safer, Northern European countries, rather than focusing on lowering funding costs in former troubled spots of Southern Europe, where it is needed most.
“The Southern European ABS market hasn’t opened to the extent people would have liked,” said Mr. Davies, noting there was only one residential mortgage-backed securities deal last year out of Southern Europe.
The ECB has faced headwinds beyond its control as it tries to revive the market.
For a start the markets on its doorstep are just smaller. Efforts to revive the U.S. ABS market were made easier by the fact that there was a larger investor base to pitch.
Mr. Draghi has also said that regulation needs to be rewritten if the market is to thrive.
In the wake of the financial crisis, banks and insurance companies were told to lay aside large amounts of capital when holding these assets. This makes them hugely expensive for banks to own relative to other investments, such as covered bonds, another form of pooled mortgage debt.
In one potential positive for the ABS market, the European Commission is trying to change these rules and reboot the market. Among other measures, the European Union’s executive arm is working on amendments to capital requirements for banks and is expected to act later this year.
Still, the ECB can at least chalk up one success from its program.
The ECB’s program has been “very helpful in de-stigmatizing the market,” Richard Hopkin, a managing director at AFME, said of an asset class that has suffered from its association with the subprime crisis.