In the year before the 2008 financial crisis, US issuance of asset-backed securities – financial instruments blamed by many for sparking the crisis – totalled $1.5 trillion in the US and $440 billion in Europe. That gap has since widened to become a chasm.
US deals in ABS, which typically package together revenue streams from loans for houses, cars or credit cards and sell them on to fixed-income investors, have grown to nearly 10 times the size of European deals, with year-to-date issuance of $332.3 billion compared with only $35.8 billon in Europe.
The revival of liquidity in the US ABS market began more than three years ago. Investor confidence grew as it became clear that pre-crisis securities were performing as they were meant to through a recession. The recovery follows the collapse of sub-prime mortgage-backed ABS, which precipitated widespread bank losses and contributed to the global financial crisis of 2008-09.
Unlike the infamous subprime securities, which were based on flawed assumptions about underwriting quality, house prices and home-owner behaviour, defaults on credit card debt and car loans have been no worse than predicted. Consequently, issuers have returned to the market to take advantage of demand from insurance companies, banks and hedge funds, which has grown as central banks pushed down interest rates on fixed income assets.
Part of the problem is what ABS proponents regard as onerous regulation. They argue measures such as Solvency II deter insurers from buying any securitised products because of punitive charges. Moreover, plentiful and cheap funding from the European Central Bank has lessened the need for ABS finance.
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