European banks are issuing asset-backed securities in massive amounts and pledging them to the European Central Bank as collateral on its term repo funding. Since September, more than 50% of European ABS issuance has been used as ECB collateral. With banks bereft of other viable funding options pledging so much to the ECB for repo financing, it will become harder and harder to return those banks to a normal funding environment. "The ECB will keep taking collateral," says a eurozone banker. "It will be a long, hard slog to get out of this."
Around 10% of the ECB repo funding has been absorbed by Spanish banks. The total securitization issuance by Spanish banks last year was €143 billion, up 55% on 2006, and none has been seen on the public markets since August. Spanish banks’ use of ECB repo funding rose from €20 billion to €50bln in 2007. Clearly, these banks are using the ECB’s term repo window for more than a little liquidity support. Some have suggested that the reliance on the ECB’s repo window has propped up Spain’s nose-diving mortgage market and enabled the country to avoid its own Northern Rock-style disaster.
| Spanish bank borrowing via main and longer-term repo |
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| Source: Bank of Spain, Lehman Brothers. |