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The European Central Bank is holding it all together, providing banks with a short-term repurchase facility

The vast majority of new issues in the European capital markets in recent months have been asset-backed securities (ABS) specifically designed to qualify for repurchase agreement ‘repo’ financing with the European Central Bank (ECB). The global credit crunch has virtually halted the refinancing by banks of their loan books through CDOs, CLOs, CMBS, RMBS and other forms of securitisation. Even covered bonds, seen as the safest and most liquid form of ABS, have been severely affected and, in September, despite a history of zero defaults in almost 240 years, new issuance ground to a halt. However, the ECB has offered European regulated credit institutions and European Union (EU) regulated branches of overseas banks the ability to continue to issue securitisations to finance their assets by providing a short-term repurchase facility for bonds that meet certain conditions.

Many banks are also arranging ‘retained issues’ to improve the liquidity of their loan pools. This involves arranging securitisations which meet the ECB’s conditions, but keeping all of the bonds so that, if the need arises, the arrangers can obtain financing from the ECB. Figures are difficult to verify accurately, but total issuance of securities which could be repo-ed with the ECB may be as much as E1,000bn (£791bn).

Any kind of ABS can be structured to be ECB eligible collateral. There are no geographical restrictions on the location of the collateral backing the bonds. The ‘haircut’, or discount, applied by the ECB to ABS which are repo-ed with them will increase to 16.4% from 1 February, 2009.

The ECB’s criteria for eligible collateral are deceptively simple. The most important of these criteria include requirements that the ABS must be:

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