Draghi’s light at end of tracker tunnel

The decision by Mario Draghi to pull the trigger on the European Central Bank’s long-awaited stimulus programme offers Ireland’s banks a way out of the seemingly intractable problem of tracker mortgages. The ECB has said it will start buying asset-backed securities and covered bonds – the challenge now is to turn tracker mortgage books into one or the other and then convince the ECB to buy them.

Securitising the Irish banks’ €50 billion-plus tracker mortgage books has been seen as an impossibility until now. The reason is that the interest rates on the mortgages – which by definition track the ECB rate – were so low that nobody could buy them and make a profit. In fact the only entity that could buy them profitably was the ECB itself, and up until Thursday it was not interested.

It remains to be seen how interested they might become, with that likely to become clearer next month. Likewise, the risk appetite of the ECB is also unknown but experience would suggest that it will not be great.

For this reason the the most likely vehicle into which tracker mortgages might be put is thought to be covered bonds rather than asset-backed securities, as they are the less risky of the two. We shall all become experts on the merits of the two vehicles over the coming weeks but the fundamental difference is that with covered bonds the cash flow related to the asset is sold rather than the asset itself, which remains on the bank balance sheet and usually has to have some capital set against it.

Either way, the net effect would be the same, with the the banks having more capital to support lending and bigger profits as a result of no longer having to bear the losses on their tracker mortgage books. In theory, anyway.