Liquifying the ECB balance sheet

The Economist points out an issue:

The European Central Bank (ECB), widely praised for providing banks with ample liquidity during the credit crunch, now has a problem: how to encourage banks to place freshly created asset-backed securities (ABS) with investors, rather than dumping them, like so much radioactive waste, in its vaults...

On the face of it there is no immediate problem. Only around 16% of the ECB's collateral so far is ABS. Banks are drinking from the liquidity fountain and keeping the cost of high-street mortgages contained at the same time, which they might not be able to do otherwise.

But it is not helping the revival of a publicly traded ABS market, and may be fostering the creation of even murkier securities. Many of today's ABS are even less transparent than those sold before the crisis—the ECB requires a rating by only one agency, not the usual two, and pre-sale reports are often sloppily prepared.

What's the answer? Well one obvious one is slowly, and with considerable vigilance over the market impact, to raise the haircuts. Countercyclical central bank window haircuts make sense. As matters improve, the ECB can tone down its roll as financer of first (and only) choice.

Another is to permit the assignment of the financing as I mentioned earlier. The ECB could allow banks to sell the securities and transfer the obligation to repay to a third party. Obviously that means the ECB would have to be willing to offer liquidity for a short period to firms who were not necessarily member banks. But if that helps restart the ABS market, it might be a small price to pay.