The good news for the European Central Bank is that the volume of ABS paper European banks will be repoing with it in 2009 will fall. The bad news is that this is not because of its revised – and supposedly tighter – collateral rules that are due to come into effect in February. It is for a far more straightforward reason – banks are running out of assets to repo. “There will be an easing in the use of the ECB’s repo scheme in 2009 as banks are starting to exhaust their available collateral,” says a European RMBS expert. And the worrying corollary of this is that they will likely do all that they can to squeeze more challenging assets into the scheme, hoping that the ECB will accept collateral that traditional ABS investors have rejected.
“People are now looking at other, less obvious asset classes for repo trades,” confirms the global head of structured finance at a London-based bank. “It would be easier to get such assets past the ECB than it would to get it past other ABS investors.” This is because as long as a deal adheres to the collateral rules it should be accepted.
