ECB cuts liquidity for banks by tightening ABS repo rules

Central bank’s ABS repurchasing facility is made more expensive to use

The European Central Bank is taking the first steps towards turning off the tap for banks using its asset-backed securities liquidity provisions.

The moves are very significant for the banks that have used the ECB repurchasing (repo) facility to issue CMBS and raise funding against it.

The ECB’s moves include ending the long-term, 12-month funding facility at the end of this month, and the six month facility next March. Full allotments for one and three-monthly finance will stop after April 2010 and the programme is due to end in March 2011.

The ECB has also tightened its criteria again for asset-backed securities’ eligibility for the scheme. After 1 March, issues will have to be rated AAA by not one but two rating agencies, which will be far more costly.

Getting rated costs about £1m and there are ongoing surveillance costs. This will also apply retrospectively to existing as well as new ABS placed with the ECB.

Conor Downey of law firm Paul Hastings said that last year, an estimated 15-20 CMBS issues  used the ECB facility, from lenders including Bank of Ireland, Anglo Irish Bank and Investec. This February, Royal Bank of Scotland did a £5bn deal called Paladium.

But the ECB has begun to  treat applications more harshly, for example applying bigger discounts to value to pre-credit crunch collateral, and since then  few banks have applied.

The latest is a £1.5bn HSH Nordbank issue called Plato, which was structured in London by Craig Prosser. “The ECB is trying to make it more difficult and expensive to do deals,” Downey said. “This is a first step; the ECB is saying: ‘guys, don’t rely on us forever’.”

Big questions for the CMBS market

Knightsbridge-based credit advisory firm Cairn Capital is acting as a consultant to the European Central Bank. Cairn’s real estate work is led by David Henriques.

The ECB has invited banks and membership organisations to talk about how to restart the securitisation market. Although 2008 was a record year for ABS issuance, it was all repurchased by the central banks: in the two and a half years since the securitisation market closed there have only been three public deals, issued by Tesco and Land Securities.

The big questions about what will happen when the central bank funding is withdrawn are: what will be the effect on banks’ balance sheets if they can’t sell on issuance previously placed with central banks; and what will their replacement source of funding be in the future?