Europe Suspends Mortgage Bond Trading Between Banks

from Bloomberg … refer=home

Interesting approach. Force liquidity to dry up to support the market.

What does this imply?
Just stop trying to sell them and pretend they don’t exist!
I may have just recently become a leading economist but I’m willing to admit there’s still a lot I can learn from my more informed colleagues.

Can anyone explain what the implications are, and in particular for the irish housing market?


It makes it more difficult to manage their balance sheets. At the margin, this means that they will need to be a bit more careful with the rate at which they increase lending and maybe retain slightly giher levels of tier 1 capital (i.e. hold more sovereign debt).

At the margin It is added cost to providing loans to customers.

So basically it will make mortgages more costly and less easily obtained?

What happens on the 26th if they fail to resume trading or have to halt again?


There are probably people with a better grasp on this than me. It’s not my area, but I’ll give it a go.

If you ask the banks that tried to sell covered bonds recently why these bonds weren’t taken up they’ll say that it wasn’t because of the quality of the mortgages, it was because of the expense of funding assets. There is a price at which investors will buy, but with the cost of funding it’s somewhere below where these bonds were expected to trade. If they start to trade at these lower prices then a lot of covered bond holders will have to mark down their books. It seems to me that the big banks who make markets in these bonds have taken this step to prevent price discovery.

What a bank can still do is issue a bond and then buy it itself, and post it as collateral with the ECB to get cash. Anglo recently did this with a UK covered mortgage bond. A cheap way to get cash.

Will the ECB continue to do this indefinitely. Probably not. The ECB is basically propping up the whole banking system in Europe right now, without much help from the BOE.

One country which relies heavily on securitisations is Spain. If this becomes a long term measure then I guess it’ll affect them the most.

I guess the upshot of the whole thing is that cash becomes even more important.

Someone else can now rip my argument to shreds.

Thanks Verbatim,

The article refers to ECBC not ECB ie European Covered Bond Council. However I get your point on ECB.

A friend of mine who is into the bank and finance stuff rang a few minuites back and reckons that it is a pretty serious situation as it has gone on since August.

It looks like the containment is spreading :slight_smile:

Quite simply a bank needs money to lend money. It can either do this through internal resources (e.g. deposits) or it can raise money through securitisations where loans are packaged & sold off. This securitisation has probably been the greatest financial innovation of the past few years and has enabled banks to lend almost unlimited amounts, the “credit crunch” has caused this to grind to a halt. The result is less money for the banks which they have available to lend.

This looks for all the world to me as if the holders of these covered bonds have put the price discovery process on hold because they don’t like the prices they are achieving. The real question to ask is not whether sellers (like AIB) can sell these things, but how much they are worth to holders if there is no market. I smell panic.

Indeed, it seems they can do both:

  • raise x cash on deposit
  • sell 9x cash (is 9 the right figure?) in mortgages
  • sell the mortgages on in a securitization
  • now they have 10x cash so they can
  • sell 90x in mortgages
    etc. etc.

Is it any wonder the world has run out of money?

How we haven’t had galloping inflation yet, I don’t know, because there must be oodles of the stuff sloshing around.

Or have I got it totally wrong? (Hopefully totally wrong in the sense that it’s not as bad as that, rather than totally wrong in the sense that it’s far, far worse!).

A very serious development.

At least those in charge are being PROACTIVE and actually DOING SOMETHING about the situation (unlike our own dear leaders).

our central bank provides no leadership and has not a single clue.

Funy you should say that.

Most citizens are fairly aware of there central bank ( i was when i lived in the uk anyway)

I do not seem to remeber anything about the Republican Bank of Ireland,
(or at least whatever its called, 'cause my personal banking is with the “Bank of Ireland” and i don’t think they do fiscal policy)

It seems Asset Backed Commercial Paper ABCP is getting to be a bit of a problem, … ex/a/14973

CDS report: European indices hit record levelsThe cost of protecting financial companies’ debt against default hit its highest recorded level in Europe on Wednesday as an increasingly bleak outlook for credit sent the closely watched Crossover index through 400 basis points.

**Bank debt has been hard hit by growing fears that at least one European institution could default due to the ongoing **fall-out from losses in the US subprime mortgage and structured finance markets.

The iTraxx Senior Financial Index - which represents the cost of insuring the senior debt of 25 European financial companies against default - hit 62 basis points in morning trade, the highest level since the current series of the index began three years ago.

This means it now costs €62,000 annually to protect €10 million worth of senior financial debt against default over five years, €2,000 more than when the index last peaked at the height of the credit crunch in August.

“There is a view that one bank in the iTraxx financials index is going to default,” said David Brickman, European credit strategist at Lehman Brothers. “But nobody knows which one. We think it’s overdone - it’s just generic fear.”

The jittery atmosphere pushed the iTraxx Crossover, a closely watched measure of risk appetite, to a series high of 401 basis points. The index has been hovering below the psychologically-important 400bp level.

“We’ve finally got there,” Brickman said. “We remain hostages to fortune. The indices are driven by what happens in the US.”

Traders in credit default swaps were spooked after Moody’s put Northern Rock’s AAA-rated covered bonds on watch for potential downgrade. Covered bonds are mortgage backed debt that are usually seen as ultra safe because they are guaranteed by the issuer.
There was also more bad news from the US, where mortgage provider Countrywide was forced to deny bankruptcy rumours and Freddie Mac, the quasi-government sponsored mortgage finance company, announced a $2bn loss.

The suspension may run longer than Nov. 26, he said.

“Due to general market conditions and the specific mechanics of the inter-dealer market making it even seems possible that inter-dealer market making will not be resumed this year,” Anhamm said. … ticlePage1

This sounds like the most serious single factor in house price declines yet.

On the other hand in the midst of all the doom and gloom of rising interbank rates:

So these guys are still willing to give you 5 year money for your mortgage at 5.19%. Not bad I would’ve thought.

Not bad indeed.

This probably has something to do with the yield curve becoming more inverted, 2-5 year rates falling.

Also, I’ve heard it said that HBOS is one of the best funded banks around. They have a huge retail base.

What’s a cautious fixed-income investor to do these days? Now, there are even worries about covered bonds, which are backed by mortgages or public sector debt but seen as ultra-safe thanks to guarantees by the issuing bank.

On Wednesday, Abbey, the UK arm of Spain’s Santander, became the third bank in a week to pull the sale of a mortgage-backed covered bond deal, as the market-making obligations of European banks in the roughly €1,600bn market were suspended until Nov 26, reports the FT on Thursday.

Allied Irish Banks and Ahorro y Titulización, a business controlled by Spanish savings banks, have both pulled covered bond deals in the past week.

Amid poor investor demand and higher spreads that have increased volatility in the normally sedate market, the European Covered Bond Council, an industry group representing securities firms and borrowers, on Wednesday announced the suspension of interbank market-making obligations until Monday to try to slow the fall in prices.

Banks will still make markets for investors, just not among themselves.

Banks including Barclays Capital, HSBC and UniCredit took the step as investors shun bank debt on concern lenders face more mortgage-related losses than the $50bn disclosed, Bloomberg reports on Thursday.

“We are in a deteriorating situation,” Patrick Amat, chairman of the Brussels-based ECBC and chief financial officer of mortgage lender Credit Immobilier de France, told Bloomberg. “A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.”

According to Bloomberg, Arnd Stricker, a management board member at Corealcredit, the German commercial property lender owned by Lone Star Funds, said at a conference in Frankfurt that covered bonds are “being thrown in the same basket” as mortgage securities, even though they are safer.

More worrying, “without market-making between banks, investors will shun the sales of new covered bonds”, Santiago Rubio, who oversees 14bn euros ($21bn) of assets as head of fixed income at La Caixa’s asset management arm in Madrid, told Bloomberg.

It looks like contagion to me, with severe credit implications.

An Abbey spokesman said, “We did some premarketing. Investors could see we are very strong, but the market for securities backed by UK mortgages is very, very poor at the moment.”

So what are the implications for Irish mortgages? The UK property market is behind the Irish market in the boom and bust cycle. Their house prices have only recently cooled off.

Suddenly the most reliable of funding sources for banks has been cut off!!

No Credit = Falling House Prices. In a market that is completly over supplied in every constituent this is leathal.

Mike Mish Shedlock on comments on the Reuters article … ex/a/14973