Central bank exit gives covered bonds new lease of life

This forecast that among EU banks alone, covered bond issuance will reach €254bn in 2023, rising to €263bn in 2024 and €250bn in 2025, compared with about €123bn in 2022. Much of this will be driven by a high volume of covered bond maturities over the next three years.

But the EBA predicts that new issuance volumes will comfortably outpace maturities, suggesting that banks are committed to replacing high volumes of maturing central bank funding with covered bonds. “Such plans would also reflect observations that covered bonds issuance can offer a cheaper source of funding than unsecured funding,” says the EBA.

Issuers in non-EU European economies, as well as Canada, are also expected to increase covered bond issuance in the coming years. This will give the market an opportunity to cement its credentials as an indispensable component of banks’ funding toolkits.

It might also expose issuers and investors to headwinds ranging from stubbornly high inflation to falling house prices and declining affordability. All of these may exert pressure on the over-collateralisation (OC) levels that are fundamental to covered bonds’ robust credit profiles.

In this roundtable, which took place at the end of August, a panel of issuers, investors and intermediaries discuss the opportunities and challenges lying in wait for euro covered bonds.

Arve Austestad, SpareBank 1: In Norway, covered bonds are issued by specialist entities rather than direct from banks’ balance sheets, so we don’t have a full overview of the latest developments in terms of deposits in real time.

But the high-level factors that influence our funding needs are the organic growth in mortgage origination and the relative pricing levels of senior and covered bonds. Most banks have been actively working to adapt to the new regulatory requirements regarding MREL. That’s now out of the way and we anticipate that the funding volumes we’ve been bringing to the Euro market in the last few years will continue at the same pace. So I don’t see any structural changes in the balance between senior and covered bonds over the next two to three years, although that may change from time to time when the senior market becomes less accessible.

Kristian André, SBAB: I don’t expect much change from previous years. It will ultimately come down to what our lending operations look like over the next two to three years. New lending combined with redemptions will dictate our covered bond issuance over the next few years. Money needs to go out for us to fund in covered bonds, and that in turn will be dictated by the mortgage market.

If anything, I’d say that in the past we probably differed a little bit from some of the other Swedish issuers in the sense that we haven’t had a very large focus on deposits in the last few years. Now that rates have risen the economics of deposits as a funding source have improved. So for about the last 18 months there’s been an internal push on increasing deposits. And as long as we don’t move into a negative rate environment, I’d say this will remain our focus.

Our deposit to loan ratio is substantially lower than some of the other Swedish issuers. We’re aiming to increase the ratio a little, and that probably means that from an economic standpoint we issue covered bonds at a slightly slower pace.

Right now, deposits are clearly the cheapest funding source for us, and when times get a little rocky, the more options you have, the better. Looking back a few years, we were very heavily reliant on the wholesale funding market, which meant that if the market took a turn for the worse, we’d still have to carry on funding regardless. But stronger deposit inflows decrease our exposure to market risk from a funding perspective.

André, SBAB: In the next couple of years we will certainly have quite large redemptions of bonds in general. That is already part of our planning. But if we see deposits continuing to come in, we’ll be able to take a small step back.

From an economic standpoint, if we feel that deposits are a cheaper funding source, we will of course prioritise that side of the market, while always maintaining a balance with wholesale funding.

But in terms of redemptions, the Swedish market works slightly differently to the euro market, which will give us the opportunity to decrease our stock of Swedish covered bonds coming up for redemption. So we’re not concerned about our redemption schedule.

Christoph Pramhofer, Volksbank Wien: We returned to the covered bond market at the end of August after an absence of four years. We were happy to be back in the market and we plan to return within the next few months and to become a more frequent issuer.

Why do we see this growth? It’s simple. We’re seeing an increase in our risk-weighted assets and in mortgage lending, but we’re also seeing fairly constant deposit inflows. At the same time, high inflation is reducing the value of our customers’ savings. This is a trend we’re seeing across the whole of the Austrian market, which of course leads to increased activity in capital market funding.

Also, the share of capital market funding in our overall mix is very low. We are aiming to increase this and bring up our loan-to-deposit ratio, so I anticipate that there will be a new covered bond in the market from us once a year from now on.

Richard Kosecky, Slovenska Sporitelna: The issuance of covered bonds will remain an important component of our funding strategy over the next three years. Based on our current plans we expect to be in the market with a benchmark deal at least once a year.

Of course, the final decision on whether we go for one or two benchmark transactions a year, as already happened in 2022 and 2023, will depend mainly on the development of our loan-to-deposit ratio and the maturity profile of our long-term funding.

Cameron Joynt, Toronto-Dominion: Funding needs are generally growing across the Canadian banking industry, just as they are in a number of jurisdictions, because of quantitative tightening. We’re seeing some reduction in deposits, but we still have loan growth we need to fund.

We start with about C$30bn ($22bn) of maturities each year, on top of which we need to finance our balance sheet growth. This has been elevated over the last two years and will remain high next year because of quantitative tightening in Canada.

So I would expect that you can expect to see more of the same from Canadian banks, which are major overseas issuers in the Euro covered bond market. We are a global relative value issuer, so we will take that C$30bn-plus of maturing bonds and spread it across markets around the world, issuing where we see the greatest value while still meeting our TLAC [total loss-absorbing capacity] needs.

Right now, we see a lot of value in the European markets. They are central to the covered bond market globally and in our case the differential between senior and covered bonds are at their wides. So we find the European market very appealing right now, as you’ve seen from the €5bn dual tranche deal we did earlier this year.

Mladen Djurdjevic, Erste Bank: I think these issuers’ programmes are a pretty good reflection of what we see in most of the major markets.

It’s been a busy year. Most banks that wanted to come to the market have already issued. A few of them which in the past may have issued only once a year have already issued twice in 2023.

It has been a year when there have not been too many tenors open to issuers. Everything has been focused in the three-to-five-year maturity range and there have been very few windows open to issuers wanting to tap anything longer.

So if something should open up longer than five years later over the next few months we may see issuers taking advantage of these opportunistic windows.

Heiko Langer, Erste Bank: I can confirm that there has been a fluctuating picture on the deposit side. But at the same time we have seen quite a sharp fall in new mortgage lending in several markets. It’s hard at the moment to assess what impact this is going to have on supply, because many banks still have unused collateral which they could either use as a buffer or as cover for new issuance. But these are two forces that work against each other, and it remains to be seen how this will play out.

Henrik Stille, Nordea Investment Management: I’m not too concerned on an aggregate level. There could be parts of the real estate market that run into difficulties. But the environment of high inflation rates that we’ve had for the last year is not unusually associated with declining nominal real estate prices.

Of course, in real terms prices have gone down, but high inflation rates simply mean that it is more expensive to build new houses. The factors that have made housing construction more expensive over the last few years won’t go away. Pay levels are up and the inputs on the construction side aren’t expected to decline materially. But in nominal terms I don’t see why house prices should fall too far because it would mean that the prices between new and existing homes would be moving in opposite directions. This imbalance would automatically be corrected by the market.

As long as we don’t run into a very hard recession I’m not too worried based on today’s macroeconomic indicators, although things might look a bit different six months from now. There may also be some specific sectors which are over-leveraged, or where there may be some negative structural changes.

Stille, Nordea Investment Management: I mean the western world as a whole, where all economies are being driven by the same factors.

Daniel Rauch, Union Investment: I’d largely echo what Henrik said about housing markets. Additionally, I’d like to mention a couple of other reasons why, as covered bond investors, we are relaxed about the credit quality of cover pools.

First, we’re generally talking about prime residential lending, which is the segment of the real estate market that is the healthiest. If you look at NPL [non-performing loan] ratios globally or on a pan-European basis, and take into account so-called unused over-collateralisation and current loan-to-value ratios, there is a huge buffer in breakeven calculations of how far house prices can fall. That’s the main reason why we’re relaxed.

Of course, there are some specific German, Spanish or Austrian pools containing a higher share of commercial real estate, which means some higher risks.

However, we are currently focusing much more on tenors and on supply than on fears of what the future may bring in terms of the housing market. Supply is the main factor that is driving spreads from a pure credit point of view.

André, SBAB: Yes. I don’t have a crystal ball, but I’m relaxed. Our internal view is that we will continue to see a drop in prices of about 20% from the peak that we saw in March 2022. We haven’t yet reached the bottom, but we are confident that our over-collateralisation levels would be sufficient to withstand a substantial drop in house prices.

One factor that may have gone slightly under the radar is that turnover has been very limited in Sweden in the first half of this year, but prices have started to increase once again, which is hard to understand. We’re not putting too much stock into this, because we do believe prices will start to come down. But it has been an interesting development this year.

By now you would have expected to see a lot of borrowers with mortgages starting to feel the effects of higher rates, so it’s strange that prices are going up. I think the most plausible explanation is that turnover is very low and the only houses or apartments that are being sold are the highly attractive ones. It’s only the top-of-the-class properties that can still find buyers.

Joynt, Toronto-Dominion: I think Henrik and Daniel were right to say that there plenty of global factors which are very consistent across the western world. But there are also potentially some local factors worth mentioning.

An important one of these is the impact that demographics can have on supply-demand dynamics in the housing market. In the case of Canada, high immigration levels and population growth are very supportive of housing prices in general.

Joynt, Toronto-Dominion: If you take a longer term view and look at the relationship between mortgage payments and household income over time, the market isn’t too elevated relative to historical trends. There may be a slight concern about where rates will be when people roll over their mortgages, but this happens in a slow-moving fashion over several years.

We are fairly conservative in how we evaluate customers’ ability to refinance, which in Canada is dictated by regulatory guidelines. This forces us to stress-test borrowers’ ability to repay at a level which is 200bp or 300bp higher than the terms of their original mortgage. So we feel pretty comfortable overall with our customers’ ability to refinance.

I always tell investors that it is the Canadian unsecured lending market rather than secured real estate lending that is the most exposed to any stress among Canadian consumers. In Canada, mortgage lending is a recourse product. You can’t just mail in your keys and disappear, US-style. You don’t see any kind of voluntary delinquency in the Canadian market and housing loans tend to be the last thing that consumers stop paying. They’ll prioritise their home loan over other payments because there’s no way out of the loan other than bankruptcy.

Obviously, we watch the trends the Bank of Canada has been talking about very carefully, but right now delinquency levels remain quite low and loan to value ratios are still quite favourable as far as covered bond investors are concerned.

Pramhofer, Volksbank Wien: I’d just add that in Austria, over-collateralisation levels are very high, at above 100% in our case, and LTVs are very low. Another feature we see in Austria is that the seasoning of loans is very high, and that loans which have been printed in recent months or years have mostly been done at very low fixed rate levels. So we’re also relaxed about the market overall and don’t see any huge problems round the corner.

Kosecky, Slovenska Sporitelna: I don’t see any big impact on the covered bond market in Slovakia. As an issuer we maintain over-collateralisation levels that are above the market standard, which we think is one of our main advantages. Our current OC level is above 50%, which we believe should give sufficient confidence to our current and future investors.

I don’t think there will be any significant deterioration in the fundamentals. But I believe it will become more and more important for investors to look on a more granular basis into issuers’ cover pools and differentiate more between transactions based on the type of assets within those pools.

Rauch, Union Investment: I agree with Richard’s point. And for us at least this is to some degree good news.

I wish that investors would start to look more granularly at cover pools, because as of now I don’t see this as a major driver of spreads. This may be a function of the way the market has developed over the last 10 years.

We have the impression that at least some parts of the investor community still don’t really look into the specifics of cover pools as much as we do. If they did their homework they’d see that issuers in some southern European jurisdictions for example have cleaned up their portfolios by increasing the share of fixed rate loans and reducing their commercial real estate exposure. It’s worth analysing what this improvement is worth in terms of basis points.

Stille, Nordea Investment Management: I agree. The impact of the large interest rate increases we’ve seen over the last year has, of course, been very different on cover pools with a lot of fixed rate mortgages compared to those with mainly variable rate loans.

The European covered market is still not at all homogenous. We still have large differences from country to country as well as from issuer to issuer. This is the foundation of our investment decisions, but it is important to recognize that these differences might not have an immediate impact on spreads. It may take six months or a year before there is any impact.

Instead, it feels to me that in the short term the most important driver of spreads is supply technicals. The market is very focused on supply, and it is this, rather than credit fundamentals, that will probably continue to drive spreads in the short term.

There are also differences in supply patterns from country to country. The Canadian issuers, for example, have the choice of issuing in euros or other currencies, which can impact overall supply.

The banks also always have a choice between issuing covered bonds and senior debt. Western European banks have opted to issue more covered bonds than usual this year, which has also been a driver of relative pricing between different countries and different issuers.

Kosecky, Slovenska Sporitelna: I agree with Henrik that in the short run the main driver of spreads will be supply/demand dynamics.

However, the main influence over the longer run will be how monetary policy tightening impacts the economy. At this stage, this is still very hard to predict. So far, based on the jobs data and on what’s happening in equity markets, it looks as though we might avoid a hard landing. But if you look for example at the latest PMI numbers from big economies like Germany and France, the outlook seems to be less positive.

Joynt, Toronto-Dominion: Sure. First of all, if you’re talking about the resilience of the market, covered bonds are awesome. They’re a great product which have shown so much resilience to so many different negative market conditions.

Talking more specifically about our €5bn deal, we got it away just before SVB. That was lucky timing, but it was a very interesting deal. It came at a time when investors’ lines were becoming open for Canadian issuers in some maturities, and we were happy to help them recycle some of that cash.

I also think that overseas issuers such as the Canadian banks are benefiting from wide differentials compared to core jurisdictions which make them attractive on a relative basis to the European investor base. That was supportive of a deal of the size we did in March. We did not originally plan a deal of that size, but we generated a much better response than we were hoping for, which was fabulous.

So I’d say the response was reflective of good timing and favourable relative value dynamics across the various options that investors had access to, combined with continued support for the Canadian jurisdiction.

Austestad, SpareBank 1: For us at Sparebank and for other Norwegian issuers the Euro market is the prime source of longer dated funding. It has not been easy to access longer maturities this year, so we are aware of the need to monitor the market for opportunities longer than five years. That market has not been open every day this year, so in that sense we can’t describe it as a super-liquid market.

Kosecky, Slovenska Sporitelna: We launched our first benchmark transaction in 2019. Then we were out of the market for some time, returning in 2022 with two benchmark issues. This year we have also issued two covered bond benchmarks.

We’ve been very satisfied with the outcomes of all these issues. But basically our experience has been the same as it has been for borrowers across Europe, where covered bonds have remained in high focus among issuers and investors. This has been due mainly to quantitative tightening, rising interest rates and strong supply in the market. This has led to shorter dated deals starting to dominate in response to stronger investor preference at the short end of the curve.

As for investor allocations, since the withdrawal from the market of the ECB, we have seen more and more real money investors participating in our transactions, which has been very encouraging.

Djurdjevic, Erste Bank: I agree with the forecast that the market is going to get a lot more interesting over the next few months.

I would say that what we have lost in terms of demand for euros from Central Banks and the ECB in particular is being compensated for by bank treasuries. To me, it does not feel as though asset managers, pension funds and insurance companies have necessarily stepped up dramatically compared to previous years, even though spread levels are much more attractive than they used to be.

With regard to tenors, it feels as though there has been too much supply within a very narrow maturity range. We’re starting to get comments from a few investors saying that issuers are stepping on each other’s toes because everything is coming in the three to five year range.

We do see increasing demand from issuers for something longer than five years, and I am hopeful that as we move towards the peak of the tightening cycle the curve will flatten and we’ll see a re-emergence of opportunities for longer dated tenors.

I don’t have a crystal ball, but I would personally expect that next year it won’t all be about three to five years, and we’ll start to see more supply in the seven to 10 year buckets. If you look at how the euro swap curve developed in the summer, at the beginning of July the 10-year inversion was about 90bp. It is now around minus 55bp to minus 60bp. And this also applies in the five to 10 year inversion which has gone from minus 25bp or minus 30bp to minus 10bp. Between seven and 10 years the curve is now almost flat. So although some of the indicators we’ve seen recently have been feeding the narrative of higher for longer, my feeling is that heading into next year we’re going to see the duration bid increase again.

Stille, Nordea Investment Management: For us, it has always been a question of spreads relative to swaps.

I know there are plenty of investors who are reluctant to buy longer dated issues because the yield curve is inverted. But we don’t mind buying the longer bonds if issuers pay a higher spread. At the moment I don’t think they’re prepared to compensate investors for the inversion of the yield curve with a steeper spread. As long as that’s the case, we will also prefer to buy the shorter issues.

Rauch, Union Investment: We have the same approach. We focus pretty much on a comparison with risk-free assets, which are German bunds. The focus on absolute yield is why we’re still seeing demand from investors that would not normally buy covered bonds, such as some dedicated corporate bond and even high yield funds.

I’ve been quoted several times as saying that I regard the credit curve as being too flat. There is still some way to go, especially in the curve beyond five years. The problem is that we have had some issuers that have been brave enough to test the market and failed.

Everyone is wondering who will be brave enough to test the longer end next. We’re unlikely to see a huge wave of new supply in these tenors this year. But at some point issuers are going to have to start coming to the market with longer tenors and in the first half of next year we’ll have a better idea of where spreads in this term segment will end up. Until then, we will still focus very much on the shorter maturities.

Looking at the latest deals we’ve seen in the four-to-five-year segment ahead of the expected wave of issuance in September, I have the feeling that bid-to-cover ratios or oversubscription levels haven’t been as impressive as they should be at this time of year. This may be a signal that there has been too much supply or too few investors.

Austestad, SpareBank 1: Developments in new issue premiums and so on are very much driven by supply patterns. Investors may ask to be compensated more, but in my view spreads are at quite a decent levels compared based on long term averages compared with most alternatives.

So, the issue for the covered bond market and the reason why book sizes aren’t super large is due to record supply and limited new demand.

The question is, what will supply be? We don’t know enough about likely total market supply. We do know that Norwegian supply will be limited, and I also think that there may be a little less supply from some of the markets that were very active in the first half of the year. But we are still in record territory when it comes to covered bond issuance, which implies higher new issue concessions. You’ll have to ask bankers like Mladen and Heiko whether that will continue.

Langer, Erste Bank: In terms of overall supply, I’d expect that next year we’ll see some normalisation. We mustn’t forget that this year’s record supply has been partially driven by several extraordinary factors, such as a big wave of TLTRO [Taregted Longer-Term Refinancing Operations] repayments [to the ECB], expectations of higher interest rates and anticipation of the end of the ECB’s Asset Purchase Programme. All of these factors fell into the first half of this year, and I don’t foresee any special drivers of a similar magnitude in 2024.

Looking back, issuers that grasped the opportunity to issue earlier in the year are probably much happier that those that chose to wait.

But Mladen, perhaps you can comment on the impact that normalisation of issuance volumes are likely to have on book sizes and the supply/demand equilibrium?

Djurdjevic, Erste: If supply decreases in the upcoming years then we should obviously see new issue premiums coming down again and spreads normalising, although they probably won’t go back to the levels we had a couple of years ago. But the widening we’ve seen in some jurisdictions has been quite dramatic. For example, in Austria we’re talking about a movement in covered bond spreads of roughly 30bp on average over the last 18 months.

As to new issue premiums, I don’t see any catalyst for them to decline over the rest of this year because year-to-date we have seen an oversupply. A lot of investors have already filled up their covered bond books. You see that on the bank treasury side and among asset managers and insurance companies. They’re telling us they’d like to participate but that they’re struggling a bit with limits. They also say it’s difficult to dispose of old low-coupon bonds because liquidity in the secondary market is poor and the Street feels fairly long.

As for next year, if there is a big decrease in supply and investors’ cash positions stay high, we might see a slight decline in new issue premiums.

Pramhofer, Volksbank Wien: Maybe as we’ve been in the market recently this is a question I can answer. What we have seen is that it is very difficult for Austrian issuers to place large quantities of covered bonds in Germany. But having spent two days in the Nordic region just prior to our recent transaction it became very clear to us that there was the potential to tap into new investor demand there.

This led to Nordic investors taking a share of 30% of our deal. This was encouraging because it’s essential for Austrian issuers to diversify their investor base by looking beyond the Dach region. There is probably an opportunity for us to find new investors in Italy, Benelux and of course the Nordic region, which we will have to do as we become a more frequent issuer.

Pramhofer, Volksbank Wien: Yes. We were very happy to have them on board and we hope we can continue to build relationships with them.

André, SBAB: We’re always striving to encourage more lines to be opened for our name, but I wouldn’t say we’re seeing any great change in the geographical distribution of our order books. This year we did a five-year benchmark which is slightly shorter than what we usually try to issue in the euro covered bond space. That part of the curve is normally where we are active in the domestic market. We try to extend where we can, but overall market conditions tend to make decisions on maturities for us.

In terms of the order book, we were happy with the overall size of the issue, but the German-speaking region is definitely the bread and butter of demand for us, with French and Nordic investors also important. We haven’t seen any big changes in demand, but we’re continuously doing investor work and we’re happy to speak to anyone who’s interested in buying our bonds.

André, SBAB: Absolutely. The more the merrier!

Kosecky, Slovenska Sporitelna: Because we’ve only been in the market for four years, I consider us to be a relatively new issuer. So I can’t say that we’ve yet seen any big change in the geographical distribution of demand.

Joynt, Toronto-Dominion: That’s an interesting question. I’d say there’s not that much difference.

If you’re asking me how our investor base has changed, at the margin there has been some expansion. But most of our European demand comes from the same countries as it has in the past. I’d echo Kristian’s comment that, as a borrower, you’re always working to expand your reach and get new lines open, but the broad strokes are fairly consistent.

Your specific question was how investor feedback varies in different locations. The first question we always get asked by investors, no matter where we are and irrespective of whether they’re looking at unsecured debt or covered bonds, is about the status of the Canadian housing market and the Canadian consumer. The questions we get are fairly consistent, although investor receptivity is sometimes a little different in Asia where some accounts can be more yield focused. But it’s marginal because even in unsecured markets we’re seen as a fairly low beta issuer.

Austestad, SpareBank 1: Our core demand is clearly from Europe. There is some sporadic interest from Asia, but it’s not picking up meaningfully. It’s probably at the same level as it was 10 years ago.

Austestad, SpareBank 1: We did the first ever green covered bond with residential mortgages which created a kind of blueprint for the market. I guess that gave us access to some more investors at the margin. It also attracted many of the same investors with different pockets that have specific internal green mandates. A lot of green bond investors are bank treasuries with a mandate to allocate a portion of their liquidity to green instruments.

For us, issuing a green covered bond triggered several new internal processes about how we originate mortgages, and it led to some changes in the way we evaluate our strategic goals within the bank. So it acted more as an internal catalyst for green banking than as a way of generating an issuance greenium or attracting new investors.

André, SBAB: As you said, we were early into the market issuing our first green covered bond in 2016 under our old framework. We updated this in 2019 to the framework we are using today. We’ll probably look to update this again in the near future to reflect how quickly things are developing in sustainable finance.

You’re right to say we’ve only done one green covered bond so far, which was in the domestic market. In euros we’ve decided to focus on senior preferred and senior non-preferred in the green market, which are slightly more challenging projects for us.

We haven’t ruled out doing green covered bonds in euros by any means and we definitely hope to offer one at some point in time. But as you mentioned, the green assets we can use are limited. Right now, we have north of Skr50bn in green assets which has allowed us to issue over Skr40bn in green bonds, and we have to operate with a buffer so we don’t overextend our green assets. But the redemptions we have coming up next year include our Skr6bn green covered bond, which we’ll look to refinance in some way.

André, SBAB: We are aware of the potential greenium, and if this is going to be most efficiently used in senior preferred or senior non-preferred there is a stronger case for issuing green unsecured bonds. But we wish we could issue more green bonds in general and it would be amazing if we could offer a green euro bond to our loyal covered bond investors.

Pramhofer, Volksbank Wien: Having sufficient collateral or green material is definitely the main challenge here, so we think we’ll use our green loans for senior rather than covered bonds.

What we have heard from investors is that green bonds themselves aren’t that important to them. They are more interested in an issuer’s overall sustainability story and sustainability ratings. So you will probably see us issuing green senior bonds rather than green covered instruments.

Joynt, Toronto-Dominion: We’ve issued a few senior unsecured green bonds, but we haven’t yet issued a green covered bond. It is certainly something that is of interest to us, but as a jurisdiction we’ve never been able to get across the line in terms of establishing a framework defining what would qualify as a green residential asset.

We have our own internal data issues that we would need to work through before we could classify these assets within our system.

While a green covered bond is of interest, we are conscious of some of the counterpoints that other panellists have raised in terms of limited greenium opportunities relative to senior unsecured, and in terms of genuine investor diversification.

Kosecky, Slovenska Sporitelna: We issued our first and so far our only green covered bond last year. I must admit that I see limited potential for further large green covered bond issuance in the foreseeable future. This is due mainly to our conservative approach with regard to the definition of green assets. So I’d agree with previous speakers that the scarcity of green assets will limit green covered bond issuance.

As to innovations in green covered bonds, I don’t expect to see many changes. But with respect to sustainable financing in general, we believe we will see a greater focus on other types of green assets such as clean transportation and renewable energy. These aren’t eligible for green covered bond pools, but they are very important for green senior bonds.

Stille, Nordea Investment Management: Our internal framework is tilted more in the direction of looking at the sustainability of the whole cover. Our investors don’t tell us to buy green bonds. They want us to buy covered bonds from issuers with sustainability characteristics that are stronger than the market average.

What we have implemented so far is a framework on a country level, and gradually as we get better data from the issuers — which we expect to receive over the coming years — it will also be possible to extend this to the individual issuer level. Our clients are expecting us to do much more sophisticated sustainability analysis of the whole cover with respect to energy efficiency and so on.

Langer, Erste Bank: I sleep fairly well these days when it comes to covered bonds. We now have the big project of EU harmonisation of covered bond frameworks behind us. Even though that settled on the lowest common denominator and some countries took longer with the implementation than others, I think that was a successful project.

I don’t see anything else on the regulatory side that worries me at the moment. It is a product where demand is driven by preferential regulatory treatment and as long as that remains in place, I don’t see any threats to the market from a regulatory standpoint.

Djurdjevic, Erste Bank: I also sleep well. Given that we have seen so many changes in the market from the macro side, with liquidity diminishing it hasn’t been an easy market and it is obviously more expensive than it used to be. But it’s still functioning well. It still provides issuers with access to funding.

I believe it will continue to function well. If we see a slide into recession, an increase in NPLs and a significant repricing in real estate markets, we will see more differentiation between cover pools and between issuers. But up to now the challenges created on the macro side have been digested very well by the market.

André, SBAB: I’m not too worried either, although I’m curious to see how soon the longer end of the curve will be back in business. We have a domestic covered bond market that is functioning very well and is a dependable source of funding at the shorter end of the curve.

So we’re usually looking to extend our maturity profile in the euro space. We can afford to be patient, but hopefully within the next few months we’ll have a much clearer picture of how the market will look in 2024 and beyond.

Joynt, Toronto-Dominion: As I said earlier, I think covered bonds are awesome, so the market does not keep me awake at night. But looking forward I’m very interested in how the pullback of central bank buying is going to affect European covered bonds. My view is that it will create more spread differentiation between core euro and peripheral issuers, which will be an interesting dynamic to watch.