Could the covered bond directive backfire?

The eagerly awaited European 'Covered Bond Directive' was supposed to ring-fence the quality of covered bonds by clearly defining the assets that are eligible for the cover pool. But the proposal risks diluting the quality of the product.

  • By Bill Thornhill
  • 13 Mar 2018
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Article six, paragraph one of the European Commission’s Monday proposal for a directive on covered bonds says that they should be collateralised by “high quality assets”, as referred to in Article 129 of the capital requirement regulation, “or by any other high quality assets”.

To qualify for in the ‘any other’ category, the assets must meet certain conditions, such as having a measurable value and an enforceable charge or guarantee on the asset.

By offering up ‘any other assets’ as covered bond collateral, the proposal widens the net compared to the Capital Requirements Regulation, which gives a clear distinction between established covered bonds that are mainly secured on mortgages or public sector loans, and anything else.

“With its current proposal, the Commission is calling for high quality cover assets, although it has not provided details of the exact requirements for permissible cover assets,” the Association of German Pfandbrief Banks (VDP) has warned.

When it comes to the eligibility of cover assets, the VDP is worried that the wording allows for too much interpretation, which it fears will take covered bonds beyond the traditional scope of the asset class.

The European Covered Bond Council was clearly also concerned that the Commission’s political imperative to boost wholesale financing for more assets would lead to a dilution of the covered bond asset class.

It tried to solve this problem by proposing a distinct new category of bond that draws on the structure of a covered bond but is firmly separate called a European Secured Note.

The proposed “Covered Bond Directive” forms a part of the European Union’s Capital Markets Union project and it is likely that, by introducing scope for a wider pool of eligible assets, the European Commission hopes to boost lending to small and medium-sized enterprises, so increasing growth in the real economy.

But if the Commission’s political imperative ends up diluting the quality of covered bond assets, it plans could spectacularly backfire. 

Covered bonds are often viewed as the “rainy day” product, giving banks access to wholesale markets in stressed conditions when all other funding avenues are closed. But if investor confidence in the product is lost because poorly performing assets have broken the covered bonds market’s unblemished 200 year record of no losses, the market’s reason for being will have been destroyed.

  • By Bill Thornhill
  • 13 Mar 2018

Bookrunners of Global Covered Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 13,951.26 77 5.56%
2 UniCredit 12,799.14 93 5.10%
3 Natixis 11,652.77 67 4.64%
4 UBS 11,388.66 61 4.54%
5 LBBW 11,285.83 74 4.50%

Bookrunners of Global FIG

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 87,198.51 364 6.21%
2 Citi 78,914.26 425 5.62%
3 Bank of America Merrill Lynch 78,244.27 325 5.58%
4 Goldman Sachs 72,613.81 636 5.18%
5 HSBC 71,510.81 339 5.10%

Bookrunners of Dollar Denominated FIG

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 70,551.16 252 11.09%
2 Bank of America Merrill Lynch 64,880.35 272 10.20%
3 Citi 61,732.00 323 9.70%
4 Morgan Stanley 54,578.23 314 8.58%
5 Goldman Sachs 54,299.46 565 8.53%

Bookrunners of Euro Denominated Covered Bond Above €500m

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Natixis 8,357.33 33 7.02%
2 Commerzbank Group 6,550.39 26 5.51%
3 Deutsche Bank 6,535.71 22 5.49%
4 UniCredit 6,513.66 27 5.47%
5 LBBW 6,441.23 28 5.41%

Global FIG Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 Morgan Stanley 365.83 497 7.62%
2 JPMorgan 332.66 618 6.92%
3 Bank of America Merrill Lynch 299.89 590 6.24%
4 Goldman Sachs 276.71 375 5.76%
5 Citi 264.54 592 5.51%

Bookrunners of European Subordinated FIG

Rank Lead Manager Amount €m No of issues Share %
  • Last updated
  • Today
1 HSBC 7,765.93 22 11.95%
2 BNP Paribas 5,338.58 23 8.21%
3 Barclays 5,124.61 20 7.88%
4 Credit Suisse 4,520.44 16 6.95%
5 UBS 3,976.00 19 6.12%