At its peak in 2005, the Pfandbrief market stood at almost €1tr, with volumes largely inflated by the public sector market. That business has long since fallen away and the market has stabilised.
As with Germany, there are many public sector covered bond programmes across Europe that are barely used, or are being wound down. But, in the context of a huge surge in regional borrowing, this is a market that may have found its time.
The mood was lifted this week after Caffil issued the first Covid-19 covered bond, which provided financing for French hospitals on the front line fighting the pandemic. As a pure public sector lender, Caffil was ideally placed to bring such a deal, in contrast to other issuers that typically have several business lines competing for resources.
But the recent surge in public sector borrowing suggests that a large wave of eligible assets are coming down the line, come what may. The German states have practically doubled their collective funding needs, and with lockdowns being enforced across Europe this swell in regional borrowing is going to be mirrored everywhere.
For those banks that are sufficiently capitalised with a long-term strategic view in place, this gush of regional borrowing presents an opportunity to ramp up cover pools and reactivate their public sector programmes, particularly if lending has a sustainable or social angle.