If it does, the movement to improve disclosure in the securitisation market would receive a boost. But banks in some jurisdictions, especially where privacy laws hinder detailed disclosure, would face greatly reduced liquidity if their securitisations became ineligible.
"There is a lot to be said for loan-by-loan level information," Francesco Papadia, director general of market operations at the ECB, told delegates on Monday at a surprisingly bustling Global ABS conference in London. "If there is good availability of this information — structured, user friendly data — it will improve surveillance."
While Papadia was careful not to say that the ECB would definitely make such disclosure mandatory for banks submitting collateral for repo, he strongly hinted that it might.
"The hope is that it will be an important component to restoring investor confidence," he said. "Loan by loan data should be available to any possible investor. We will bear in mind disclosure standards when considering which securities are eligible for refinancing operations."
In response to a question from the floor, he clarified his statement. "We haven’t decided yet. Loan by loan information is very heavy — it is an enormous amount of data. We have to find a way to make it usable. Then we will
see if it should be in the eligibility criteria."
Loan level disclosure has become the norm in the US, but is very rare in Europe, particularly in public reports.
Investors who request loan level data receive it in some instances — large loan CMBS issues often provide details on each loan, for example, and a handful of non-conforming issuers have begun to provide such disclosure. But the vast majority of the market provides only aggregate data.
The European Securitisation Forum’s recently launched issuer principles for RMBS do not require loan by loan disclosure for prime collateral and have only been adopted by issuers in the UK and the Netherlands.
Banks in countries with strict data protection laws such as Germany may find it even harder to comply, although work has begun on creating a unique loan identifier that would facilitate disclosure without revealing the borrower’s identity.
The revelation came in the context of a discussion about whether the ECB was harming the recovery of the market by removing incentives for public issuance.
The suggestion was that the ECB is starting to look at ways to wean banks off its liquidity facilities, particularly with regard to ABS, which has become the largest single asset class lodged with the central bank.
Papadia said that ABS made up 28% of ECB collateral in 2008, although this had declined to 20% in the first quarter of 2009.
His comments were reinforced by his deputy Paul Mercier, who told a conference in Paris that the ECB has "serious problems" with its ABS collateral. "We would want more transparency and to know exactly what’s behind it," he said.
Both officials said their biggest concerns were with deals constructed specifically for use with the ECB.
Some have already experienced a dramatic deterioration of their underlying assets and been downgraded severely, while the collapse of Lehman Brothers and the Icelandic banks left the ECB facing losses on some ABS.
A less drastic measure than excluding deals with only aggregate information might be to impose higher haircuts on deals without loan level disclosure, although Papadia did not raise the possibility himself.
His comments also followed European legislation which most securitisation lawyers agree will require sponsors to provide loan level disclosure if they wish to sell securitisations to banks.
The amendments to the Capital Requirements Directive and Papadia’s revelation sparked intense debate at the conference. Some questioned the need for loan level data, particularly for prime RMBS, given the costs of implementation. Others, in contrast, strongly supported its introduction.
"It’s the logical next step, but we have other issues on our plate," said Janet Oram, senior credit analyst at Barclays Global Investors.
"ABS is tarnished to our clients. The biggest issue for us is liquidity and price transparency. The second is ensuring that when things go wrong, we’re happy that it will be sorted out quickly. Disclosure is third on the list."
Chris Dammers