War Chest Of Assets To Be Built By Spain

Spanish bankers are making moves to address the closed state of the wholesale money market so far this year, by accruing assets to form a ‘war chest’ that would be used as collateral for accessing European Central Bank credit.

Spain has seen large-scale increase in mortgage credit in the last few years, with this increase being largely due to the banking sector’s increased use of mortgage-backed bond markets for lending growth. Spain is second only to the UK in this kind of financing.

Since the global credit crisis that arose last summer, the money markets have been highly reluctant to new issuance, which has sparked Spanish banks to increase their provisioning of liquidity auctions held weekly by the ECB, using mortgage-backed bonds as collateral.

For the process to work, the Spanish banks are securitising large pools of mortgage debt, then they keep these pools as a part of their balancing sheets, and rather than selling it, they guarantee it to the ECB and are given funding in exchange. Spain is not the first to do this, for a long time Dutch banks have created large-scale pools of securitised bonds, which they are yet to sell.

The difference with Spain’s central bank to others is, they publish the figures on amounts raised from this practice with the ECB, where as most other countries do not.

At this point, Spain takes around 10% of ECB’s total, which is up from 5% not too long ago, this is a raising of nearly €24bn ($34.8bn) in Spanish lending. These figures now run in line with Spanish importance in the Eurozone economy.

Spanish bankers stress that this is not an undue growth, as they were under lending before hand.

ECB president, Jean-Claude Trichet has stated that the ECB has changed no rules to accept mortgage backed bonds, and that they are in no way rescuing Spain or any of the Eurozone economies.

Analysts state that this issue does lead to the question of where Spanish funding will come from in the future.

José Antonio Álvarez, chief financial officer at Santander – Spain’s largest bank, has stated that there short-term position is very strong, and that in the future they will be able to pay premiums in wholesale markets that many banks wont be prepared to pay.

The usual scenario with mortgage-backed bonds is that they are sold to long-term investors to secure funds, however with the ECB, the funds only become available weekly, and then they are not guaranteed.

The concern from analysts is that when these bonds that are guaranteed to the ECB have to be sold in the market, they could cause large-scale subsidence. Also, this kind of lending could be forcing a halt of the repricing of risk in bonds markets that could be what the markets need to find stability again.

Spanish bankers have counted this by stating that they are just creating liquid assets from mortgage-backed bonds, from liquid assets such as ordinary mortgage books, but only on the off chance that they are needed.

Financial directors have applauded Spain’s movements, stating that building war chests for ECB funding requires a high-degree of liquid assets.

According to figures from Spanish banks, there seems to be far more securitised bonds created, than actually used. Santendar has stated that they have €30bn in bond securities, whilst the second largest bank is Spain, BBVA have stated they have €60bn in bonds as well.

Another bank in Spain, Popular, which used to relay on the wholesale markets for 42% of their funding prior to last summer’s credit crisis, have stated that though they are not going to ECB auctions for funds, they do have around €11.4bn in bonds.

Last December, the largest such mortgage-backed bond deal was arranged between the ECB and Dutch bank, Rabobannk, with the deal being worth a whopping €30bn.

In comparison with regular figures, this years securitisation markets have been described as chunky, and analysts have expressed concern that when the markets reopen, investors are going to have to be bold.

Story link: War Chest Of Assets To Be Built By Spain