Seven years after being blamed for the subprime mortgage crisis and the global financial collapse, will the European Central Bank’s new bond-buying program rejuvenate the much-maligned asset-backed security?
ECB President Mario Draghi announced in September that, starting next month, the central bank would buy ABS and covered bonds from the euro zone’s banks, with the idea that there would then be more credit in the economy.
“This is quite complex package of measures,” Draghi told assembled journalists at his regular press conference in September.
“The purpose is very different from previous programs… the aim is to increase the measures that produce credit-easing… and also to significantly stir the size of our balance sheet towards the dimensions it used to have at the beginning of 2012.”
ABS refers to securities whose value is securitized by the income from a pool of underlying assets, which can include commercial or residential mortgages, credit card debts or car loans. Securitization became increasingly popular from the 1980s onwards, but its reputation was heavily tarnished by the U.S. subprime crisis of 2007, when major banks collapsed after loading up on securities backed by mortgages which then defaulted in large volumes.
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