Posted by: Dirk | February 19, 2008

Asset-backed securities and the ECB

The ECB has recently acquired a large chunk of asset-backed securities, according to the Financial Times:

Eurozone banks increased sharply their use of mortgage-backed debt and similar structured bonds last year in order to raise money from the European Central Bank, helping to avoid liquidity problems in financial markets.

The volume of asset-backed securities pledged as collateral in ECB market operations to provide funding to banks reached €215bn ($315bn) by the end of last September, the bank said in data released on Thursday. This took the proportion of such debt being used up to 17 per cent of all collateral pledged, up from 12 per cent in 2006.

This is a central bank as a lender of last resort. Apparently, Spanish and Dutch banks are among the heavy users of this opportunity to increase liquidity. Nobody else seems interested in buying these assets. The value of Spanish asset-backed securities is set to fall, and Spanish banks were not allowed to unload these in international financial market because the Banco de España didn’t let them (see here). At least the problem is contained and we know where the risk is. That way something can be done.

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