European banks have leapt on the US bandwagon of securitising and distributing mortgages to investors. The practice enabled rapid expansion of lending and lower prices for borrowers. It appeared a good deal for everyone.
Similar practices have a long and distinguished history in Germany, where banks have issued covered bonds – Pfandbriefe – backed both by mortgage assets and the issuing institution. Often these bonds had implicit government guarantees as they were issued by the Landesbanks, state-owned regional banks.
But what few realised in the rush to issue mortgage securities was that the regulatory cushions that exist in the US are absent in Europe. It means that in the UK, mortgage lenders are seriously short of funds to meet demand for loans.
In Spain, the other big market, banks are increasingly borrowing short-term funds from the European Central Bank, secured against mortgage-backed assets.
John Price, president of the Federal Home Loan Banks system and head of a HLB in Pittsburgh says: "In Europe there isn't any animal quite like us – that means that incidents like Northern Rock or IKB were much harder to deal with."
According to Moody's, with the public securitisation market, in effect, shut, European banks have increasingly been securitising mortgages on their balance sheets and holding the securities so they can be used as collateral at the ECB and Bank of England.
Moody's says it has been asked to rate about two dozen deals since the start of the year in the asset-backed and residential mortgage-backed securities categories.
"At least 90 per cent are balance sheet deals, some of which will be repo with ECB/BoE," Moody's says.