Sunday, May 6, 2012

ABS - the changing face of US "shadow banking"

Here are the latest statistics on the US asset-backed securitization industry - the so-called "shadow banking". In spite of what has been said about ABS, it continues to be a critical source of financing in certain areas. Unlike in Europe where banks are the dominant source of credit, the US capital markets provide essential non-bank access to credit. It means that if the banking system is not ready to extend credit for some reason, other channels of liquidity may still be available (and lending doesn't come to a grinding halt as it did in Europe).

The chart below shows the total ABS outstanding over time in the US. It has peaked in 2007 at just under three trillion and has been on a constant decline as existing deals gradually roll off.

Total US ABS outstanding ($bn; source: sifma)

The new issuance has dropped of dramatically since the peak in 2006 and the business is now a shadow of its former self. But that's not the whole story. A large part of the rise in ABS issuance was based on home equity loans. That type of securitization stopped in 2007 with the US housing bust. To kick-start the market after the crisis, the Fed implemented the TALF program back in 2009 (also see this post). Since then a relatively small private ABS market continued to thrive.

ABS issuance (USD MM, source: sifma)

Here is how ABS issuance changed between 2006 and now - shown by collateral type.

ABS issuance by collateral type in 2006

ABS issuance by collateral type in 2011-2012 (source: sifma)

Investors moved away from housing related and longer term collateral such as home equity and focused on shorter term loans. The "Auto" sector that is now over half of the new ABS issuance includes car loans, leases, and dealer floor plans. Even in the subprime auto sector default rates have been significantly lower than in the mortgage space. That's because many subprime auto borrowers could not qualify for a house mortgage - thus had lower overall payment obligations. And those who did would often default on their mortgage while keeping their car payments current. In fact auto loans are so popular among investors these days that banks prefer keeping them on their balance sheets rather than securitizing them. With interest rates at extreme lows and lack of "quality" new fixed income products, the demand for ABS in the US is expected to gradually increase.

ABS activity in Europe is a whole other story however. The biggest "taker" of the product has been the ECB since the central bank allowed ABS to be used as collateral. For further information on that market see this paper from the ECB (ht Kostas Kalevras). Note that their analysis does not seem to include the whole of 2011 - so may be a bit dated.

For those interested in learning more about the ABS process, a good reference maintained by NYU can be found here.
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