European banks are failing to wean themselves off central bank money, even though steep falls in the cost of collateralised borrowing over the summer mean some now have the option of funding via public markets.
Like their US counterparts, European banks can now fund certain loans more cheaply than at any time in four years by bundling them into so-called asset-backed securities (ABS) and selling them to investors with interest backed by cash flow from repayments on products such as credit cards, car loans or mortgages.
But the issuance of European ABS to investors is at a three-year low as banks use assets as collateral for central bank funds instead.
Since the financial crisis in 2007, the volume of ABS, particularly in Europe, has been weak. Over the summer, the banking industry launched a new European kitemark, the Prime Collateralised Securities project, in an effort to revive the reputation of the region’s ABS.
Issuance of European ABS to investors this year is running at just €47bn, the lowest level since 2009 when the market was reeling from the financial crisis, according to JPMorgan data.
In the US the $148bn issued so far this year, according to Asset Backed Alert, suggests the sector will overtake the $157bn total for 2011.
The weak European ABS volumes come despite a rise in demand as investors seek alternatives to low yields on many assets. That demand has helped push down the spread – part of the interest rate paid to investors – on the most creditworthy UK mortgages, for example, by more than half this year.
Spreads on Spanish residential mortgage-backed securities (RMBS) have fallen 3 percentage points, allowing some of the country’s lenders to sell senior tranches of ABS in private transactions, according to market participants. The launch of the QE3 quantitative easing programme in the US, which will see the Federal Reserve buy mortgage-backed securities, is expected to cut yields on those products further.
“Spreads have broken through to new levels this year and we expected to see issuance from [European] banks but that has not happened,” said Steve Harrison, a portfolio manager at Cairn Capital, a credit asset manager.
Many European banks are opting to swap ABS with the European Central Bank or Bank of England instead of selling them to investors, calculating that the central bank financing is still cheaper.
Additional reporting by Vivianne Rodrigues and Stephen Foley in New York