The European Central Bank’s term repo window shows no signs of diminished popularity. With the European mortgage-backed market firmly shut, the central bank has continued to back securitization technology and extend liquidity for triple A-rated securities issued by Europe’s banks.
In Spain, the market is in such a poor state that there hasn’t been a single covered bond issued since 2007, and no RMBS issues have been seen in the public markets since August. The banks are using the RMBSs that they have originated as collateral on the ECB’s term repo funding.
Spanish banks borrowed €44 billion in February from the ECB, a return to December levels after a small drop, to $39.6 billion, in January. Only time will tell whether the ECB’s decision to trust the ratings and provide liquidity to triple A-rated MBS is wise. Banks are already starting to include commercial real estate mortgage and second-lien loans in their collateral pools.
| Europe’s credit crunch still biting |
| ABS issuers turn to ECB |
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| Financials issuance falls |
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| Public sector takes up some of the slack |
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| Source: Dealogic |
With no signs of a recovery in the bond markets, it will be very difficult for the ECB to wind down the repo facility in the near term.