Simple and transparent asset backed securities (ABS) – bundles of loans such as mortgages or business loans – can be sold on to non-bank investors who want to lend to those sectors.
The repackaging and selling on of loans can also provide an extra source of funding for banks to increase new lending.
“As ABS can be customised, for example in terms of asset exposure, geography, and maturity, they can satisfy the needs of most non-bank investors, whether a pension fund, an insurer, or an asset manager,” said European Central Bank executive committee member Yves Mersch. “We see longer-term monetary policy benefits to a stronger ABS market: firms that are less reliant on bank finance in future downturns, and banks that are less constrained in their lending decisions by their capacity to hold credit risk.”
He is joining the Bank of England on this, as the British authorities last week called for securitised loans to play a greater role.