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CORRECTED - ECB may tighten up ABS collateral rules

Published 06/02/2009, 03:29 PM
TTEF
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(Corrects headline to ECB from ECM)

By Natalie Harrison

LONDON, June 2 (Reuters) - The European Central Bank may tighten up the rules on the European asset-backed securities (ABS) it accepts from banks as collateral in liquidity operations, a European Central Bank official said on Tuesday.

"The need for more detailed information on the pools of loans that make up ABS is one area under consideration," said Francesco Papadia, director general of market operations at the ECB.

"The work we are engaged in is to make this huge amount of (loan) data usable. Then we will decide whether or not it will go into our eligibility criteria," said Papadia, speaking at the first day of the two-day annual Global ABS conference in London.

In order to restore confidence in the ABS market more transparency is needed, which may help draw demand from institutional investors, he added.

Structured investment vehicles (SIVs), conduits and hedge funds had been the major buyers of ABS before the subprime crisis forced them out of the market.

"The brilliant idea of securitization has been almost destroyed by bad implementation. What we need to get out of this unsatisfactory situation is to improve investor confidence," he said.

"For the rebirth of ABS, the investor base will have to be broadened so that buy and hold institutional investors are attracted over the longer term. Loan by loan information should be available to all investors," he added.

Simpler and more transparent products will need to be created in the future, Papadia said.

EXIT STRATEGIES

European banks pledged less ABS in repo transactions with the ECB in the first quarter of 2009, Papadia said.

ABS accounted for 16 percent of the total collateral posted with the ECB in 2007, which increased to 28 percent in 2008 and then shrank to around 20 percent in the first quarter.

The ECB took a total of 1.6 trillion euros ($2.3 trillion) on average in collateral in 2008.

That may be an indication that banks are relying less on repo facilities to fund themselves.

Papadia warned that the ECB cannot keep lending for an indefinite period.

"We are aware that we have provided a bridge but also taken away some incentives for banks to function," he said.

ABS experts said, however, it is too early to be talking about exit strategies for central banks, whose repo transactions have given banks a lifeline.

"I think we will start to see more a la carte quantitative easing," said Steven Major, global head of fixed income research at HSBC, also speaking at the conference.

He referred to the ECB's announcement that it will buy around 60 billion euros' worth of covered bonds.

"In the not too distant future we will have to come off the methadone we have been prescribed and start acting on our own. It could be a tricky process," said Kevin Gaynor, head of economics, global banking and markets at Royal Bank of Scotland. ($1=.7035 Euro) (Reporting by Natalie Harrison, editing by Gerald E. McCormick)

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