BREAKINGVIEWS – Troubled banks could revive securitisation’s role

January 5, 2010

— The author is a Reuters Breakingviews columnist. The opinions expressed are his own —

By Neil Unmack

LONDON, Jan 5 (Reuters Breakingviews) -The key number is $7 trillion. That’s the value of bank debt that needs to be refinanced in the next three years, according to Moody’s. It’s probably more than can be raised by relying solely on bank balance sheets, and central banks are planning to withdraw their support. Securitisation of bank assets looks like a good way to reduce the refinancing burden.

But the world has changed. In the credit boom, banks would sell off doubtful loans with abandon. New accounting rules and the looming regulatory requirement to retain a larger chunk of the risk in securitised loans is supposed to curb such excesses. That may also make securitisation less attractive.

Well-capitalised institutions will find unsecured debt, covered bonds and deposits cheaper and easier forms of financing. Jamie Dimon, the JPMorgan boss, has said that’s why the U.S. bank is unlikely to fund its credit card business in the asset-backed market. But many less healthy banks — such as Citigroup in the U.S. or many lenders in Ireland, Spain and Portugal — don’t have this luxury.

Will there be buyers? Right now there is some demand for the highest-rated tranche, in part because buyers of this paper can often earn fat returns by taking advantage of relatively cheap funding from central banks. Lower-rated tranches, which do not qualify for central bank support, are still hard to sell at a yield that makes sense to the issuers.

The problem is less acute in the United States, where $87 billion of non-agency asset-backed debt was sold without government assistance in 2009, than in Europe, where the comparable total was less than 7 billion euros ($10.12 billion). But on both sides of the Atlantic, the challenge is the same — to restore at least some of securitisation’s maligned reputation.


(Editing by Peter Thal Larsen and David Evans) ($1=.6920 Euro)

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