FRANKFURT (Dow Jones)--The sharp rise in European securitization could be eroding the effectiveness of interest rate changes on the real economy.
The European Central Bank said in its February monthly bulletin issued Thursday that the flood of asset-backed securities through the European banking system lowers the ECB's ability to steer bank lending.
"According to some tentative empirical evidence, the increase in securitization is expected to diminish the impact of monetary policy changes on banks' loan supply," the ECB said in its February monthly bulletin Thursday.
Securitization describes the process of pooling financial assets, such as residential mortgages or credit card receivables, and their subsequent sale to a special purpose vehicle. This bundled security is then put on sale to investors.
Since the start of the financial market turmoil last summer, the use of ABS has also played an important role in the ECB's repurchase, or repo operations at which commercial banks can get liquidity in return for eligible collateral.
Total issuance in the European securitization market rose to about EUR497 billion last year from just EUR78 billion in 2000, data from the European Securitisation Forum showed. Issuance has been particularly high in Spain and the Netherlands, where mortgage lending has outstripped deposit growth.
Securitization is expected to weaken the effect of an interest rate hike on credit supply, as banks tap additional liquidity though the repackaging and sale of financial assets and not only through deposits and equity.
But economists say that doesn't mean the ECB would be rendered powerless.
"The immediate impact of monetary policy changes may be lower, as ABS are sold globally and banks are therefore less dependent on domestic interest rates," said Manfred Neumann, a monetary policy expert at Bonn University.
"But that doesn't mean that banks can escape the effect of higher or lower policy rates at home. On the contrary, bank lending may become more volatile, particularly in episodes of rising interest rates globally," Neumann added.
The rise in securitization is likely to "tighten the connection between banks' funding and financial markets," the ECB said: "Banks' incentives and ability to lend are expected to depend on financial market conditions to a larger extent than in the past, when banks were overwhelmingly funded via bank deposits."
The sharp rise in securitization may also help to explain why broad money and credit growth has remained rampant throughout 2006 and 2007, despite the doubling in the ECB's key policy rate 4% from 2%.
"Under more extreme circumstances, the impact of the banking sector's situation on credit conditions could actually be significant," the ECB cautioned.
The news came as European banks have pledged a record amount of asset-backed securities to the ECB as collateral to use in their repo operations, indicating that banks continue to rely heavily on the ECB for liquidity.
By the end of September 2007, the latest figures available, banks had pledged EUR215 billion worth of ABS with national central banks in the euro zone, the ECB said Thursday. Banks had deposited roughly EUR100 billion of ABS as collateral in 2006, the ECB's 2006 annual report showed.
"The wide acceptance of high-quality collateral in the Eurosystem's credit operations has probably helped indirectly to mitigate liquidity problems in a number of markets," the ECB said.
The European Central Bank said in its February monthly bulletin issued Thursday that the flood of asset-backed securities through the European banking system lowers the ECB's ability to steer bank lending.
"According to some tentative empirical evidence, the increase in securitization is expected to diminish the impact of monetary policy changes on banks' loan supply," the ECB said in its February monthly bulletin Thursday.
Securitization describes the process of pooling financial assets, such as residential mortgages or credit card receivables, and their subsequent sale to a special purpose vehicle. This bundled security is then put on sale to investors.
Since the start of the financial market turmoil last summer, the use of ABS has also played an important role in the ECB's repurchase, or repo operations at which commercial banks can get liquidity in return for eligible collateral.
Total issuance in the European securitization market rose to about EUR497 billion last year from just EUR78 billion in 2000, data from the European Securitisation Forum showed. Issuance has been particularly high in Spain and the Netherlands, where mortgage lending has outstripped deposit growth.
Securitization is expected to weaken the effect of an interest rate hike on credit supply, as banks tap additional liquidity though the repackaging and sale of financial assets and not only through deposits and equity.
But economists say that doesn't mean the ECB would be rendered powerless.
"The immediate impact of monetary policy changes may be lower, as ABS are sold globally and banks are therefore less dependent on domestic interest rates," said Manfred Neumann, a monetary policy expert at Bonn University.
"But that doesn't mean that banks can escape the effect of higher or lower policy rates at home. On the contrary, bank lending may become more volatile, particularly in episodes of rising interest rates globally," Neumann added.
The rise in securitization is likely to "tighten the connection between banks' funding and financial markets," the ECB said: "Banks' incentives and ability to lend are expected to depend on financial market conditions to a larger extent than in the past, when banks were overwhelmingly funded via bank deposits."
The sharp rise in securitization may also help to explain why broad money and credit growth has remained rampant throughout 2006 and 2007, despite the doubling in the ECB's key policy rate 4% from 2%.
"Under more extreme circumstances, the impact of the banking sector's situation on credit conditions could actually be significant," the ECB cautioned.
The news came as European banks have pledged a record amount of asset-backed securities to the ECB as collateral to use in their repo operations, indicating that banks continue to rely heavily on the ECB for liquidity.
By the end of September 2007, the latest figures available, banks had pledged EUR215 billion worth of ABS with national central banks in the euro zone, the ECB said Thursday. Banks had deposited roughly EUR100 billion of ABS as collateral in 2006, the ECB's 2006 annual report showed.
"The wide acceptance of high-quality collateral in the Eurosystem's credit operations has probably helped indirectly to mitigate liquidity problems in a number of markets," the ECB said.
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