Nouns and verbs

21 May 2014 | Richard Kemmish

What is the difference between a covered bond and a securitisation? Well, lots obviously. So many and the question has been asked so many times that it’s pointless rattling through them all again here.

Francois Haas of the Banque de France recently made the interesting point that he thought of covered bonds as a technique rather than as a brand. I’m not sure that the covered bond market would agree as readily as the securitisation market would if he had made the same point about them. 

A key difference between the markets for me is that securitisation is a noun (“I just bought a securitisation”) that has spawned a verb, (“I securitise, you securitise, they securitise”) - possibly it was the other way round, if anyone knows drop me a line. Whereas ‘covered bond’ is only and incontrovertibly a noun, any attempt to create a verb from it is doomed to failure, not least from an aesthetic standpoint (“lets covered-bondicise those assets”).  

So what? I hear you say. 

I think some of the vitriol can be taken out of the covered bond/securitisation debate if we covered bond people think of securitisation as a verb, a technique as Mr Haas would put it, which we don’t normally do. We are used to thinking of it as a noun: a thing, not as good as our thing. But securitising is as morally neutral as writing. But what you write, that’s the important bit. 

The failures rightly or (more often) wrongly ascribed to the securitisation market really stem from the application of the process of securitising to the wrong assets or to wrong levels of risk transfer or to the wrong investors or at the wrong time or in the wrong place (respectively: subprime mortgages, all, heavily leveraged investors, pre-crash and in the rectangular American states). 

The securitisation market (noun) can be a valid contribution to the recovery of the European economy if people securitise (verb) correctly. Initiatives like PCS are doing a good job to draw a line around a group of securities that have used this technique and convert them into a Brand that investors and central bankers trust.

On the other hand, securitisers would understand us covered bond people and our behaviour a lot better if they realised that covered bonds are a noun. Or if you prefer a brand.  

Many people in our market can feel uncomfortable with what Mr Haas said about  the technique of coveredbondicisation (nope, still not a nice word) being applied to new asset classes not because we think there is anything wrong with the technique but because it dilutes the brand.

Perhaps the low take up of the Covered Bond label in Germany is because Germans are more used to thinking of the product as a noun because they are so aware of their distinct brand identity, one protected with as much force and vigour as the brands of Coca Cola or Champagne. When more Germans think of ‘Covered Bond Label’ as being a translation of the word ‘Pfandbrief’ into English then maybe we will have a more unanimous definition. Then perhaps we can use the technique that created this brand to produce the next brand. 

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