Although the ECB's covered bond purchase programme has hurt the market in some respects, thinning out liquidity, taking spreads too tight, and forcing covered bond teams to shrink, for some market participants, it has been great news.
Some of Europe's most troubled issuers have been tempted to turn to the covered bond market, as the programme has cut their funding costs, which may in turn help revive Europe’s economy.
Without help from central bank buying almost all covered bonds issued since the end of August from institutions in Italy, Spain and Portugal would not have come to market.
If issuers had braved a purely private sector market, deals would have been much smaller, and much wider.
In the last six Spanish Cédulas, all of which were barely subscribed, the Eurosystem bought approximately half.
The last three Italian covered bonds, all priced this week, included names that had failed the ECB stress tests such as Banca Carige and Monte dei Paschi di Siena. And over in Portugal, courtesy of the ECB’s help, Santander Totta brought the first benchmark since the beginning of the year on Monday.
CBPP3, for all its possible damage to the wider market, has been of intrinsic value to these borrowers.
Funding their mortgage books at a discount to market levels should enable them to pass on their savings to the consumer, as well as grow profits and improve their capital ratios.
But, in the long run, it’s difficult to know whether keeping a private sector funding lifeline going with subsidised public sector money simply postpones difficult choices among bank management. Some of these institutions have already raised capital — MPS asked for €2.5bn — but radical reconfiguration, especially in Italy, is a long way off.
Many banks may have made considerable progress towards health, but some are still in convalescence, so it remains to be seen whether the recapitalisation and revitalisation work they are continuing to do will be enough.
Moreover, the challenges European banks face may not lie simply at their doorstep, but in the evolving financial architecture on which they are founded, something that has yet to really be tested.
The Single Supervisory Mechanism and Banking Union was supposed to help break the bank-sovereign nexus, but this week’s suite of deals, where national central banks have supported funding lines for some of their weaker institutions, show it is very much still alive.