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What does Brussels want?

07 August 2014
Richard Kemmish


Freud famously said that the great question that he was never able to answer after 30 years of research was, ‘what does a woman want’? Sometimes I feel the same about the European Commission’s approach to the covered bond market. Clearly they like us, to the extent that they are happy to diverge from the Basle accord rules to give us preferential treatment – most recently in the liquidity ratio rules. But what are we for?

To answer that question maybe it is worth asking why covered bonds get preferential treatment in the first place? a question often asked by securitisation market participants but usually only in a rhetorical way.  The cynical answer (that which the securitisation market would subscribe to), is that it is because covered bonds were invented here and that they aren’t securitisations.

A more realistic answer is a combination of empirical evidence over the course of the crisis (both credit and liquidity), fitting into the zeitgeist (regulated financial markets are safer than unregulated) and trying to reduce the bank/sovereign credit nexus.

All of which factors point to covered bonds as being a source of stability in the financial system – the more banks use them the less likely they are to fail or be bought down by a failure of their own sovereign.

But, Commission’s paper on financing growth in the European economy and numerous conversations around the topic suggests that the covered bond concept could be applied to other funding needs, most obviously the SME sector but also potentially infrastructure projects. To the extent that stability and growth are potentially conflicting objectives of policy this creates the dilemma – covered bonds as they always were, stable and safe, or covered bonds as an alternative to securitisations, an engine for economic growth working across asset classes.

An alternative objective is a parallel shift in the growth/stability trade-off curve. For any given amount of stability, covered bonds produce a greater level of growth. Or visa versa.

Similarly the ambivalent attitudes towards aircraft pfandbrief (EBA contra, others more positive) and the VDP’s robust defence of the concept suggest that improving the competitiveness of the european banking system could be a third objective, again potentially at odds with the first.

To summarise, I don’t know what Brussels really wants any more than I can answer Freud’s great question (and I really struggle with that one too). Maybe Brussels doesn’t know either, it isn’t as if it always speaks with one voice.

But I do know that this topic will be discussed at a roundtable at 10:45 (“Never waste a good crisis”) at the Euromoney/ECBC covered bond conference in Freud’s home city.

Please turn up.  Please bring an opinion with you.

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Tags: Covered Bond