Europe's ABS Market: Thing of the Past

By RICHARD BARLEY Securitization used to be the future. Is it now destined to be the past? Bankers gathered in London for an industry conference are beginning to wonder. Most parts of the credit markets have reopened, but the European asset-backed securities market, a key source of funding for consumer and corporate lending, remains effectively closed. Nearly two years into the crisis, the ABS market is still reliant on central bank support. The supply of assets to be securitized remains huge: Since summer 2007 €1 trillion ($1.42 trillion) of assets have been packaged as bonds, according to Royal Bank of Scotland. But nearly all that has been retained by issuers and used as collateral for central bank repo operations. The European Central Bank says 28% of collateral it accepted in 2008 was ABS, up from 16% in 2007. Traditional buyers -- banks, structured-investment vehicles and conduits -- which accounted for two-thirds of the market, are deleveraging or no longer exist. The snag is that central bank support is hampering the recovery of private market activity. For that to happen, the industry needs to rebuild its investor base. Some proposals under consideration, such as government guarantees, won't solve the problem since guaranteed products tend to attract investors looking to take interest-rate risk rather than credit exposure. A revival of the private ABS market faces further uncertainties. Ratings agencies are still revising their approach to securitizations. And regulators will require much more capital to be held against ABS in future. The Federal Reserve's TALF program has stimulated some U.S. activity. But without serious action, Europe's securitization markets look set to remain moribund. Write to Richard Barley at richard.barley@dowjones.com