A recurring theme of every conversation about covered bond harmonisation is just how different each countrys covered bond market is. The tension between the desire to harmonise and national specificities in the underlying mortgage or bond markets is the defining feature of the debate over future legal frameworks. Whilst looking into this topic on behalf of the European Commission recently I have lost count of the number of times I have heard a sentence along the lines of: I agree with harmonisation in principle but in this country......
Are the countries of the CEE region just another group of national specificities to be added to the mix? Or are they different in different ways?
This is a particular concern for me for one simple reason: the loudest voices in the debate are, naturally, the voices of the largest existing covered bond jurisdictions. Germany and Denmarks opinions will be weighted more heavily than Poland or Romanias. The political lobbying that will inevitably influence the final covered bond directive will come more readily from MEPs from the countries where covered bonds are already of systemic importance.
Some of the differences within the CEE region are the same as differences within western Europe some have high levels of home ownership, some low, some have fixed rate mortgages, some floating. So the debate about the appropriate degree of harmonisation is the same and the loudest voices element to the debate wont matter particularly.
What concerns me though are those problems that are either specific to issuers in the CEE or much more prevalent here. These problems are myriad and complex. A flavour:
Most of the countries in the CEE region are smaller than most of the countries in western Europe. Combine this with lower mortgage to GDP ratios and relatively granular banking markets and it is clear that issuers and therefore issues will be smaller on average. Anything that improves the market but only at the expense of much higher fixed costs (in practice practically every upgrade of the market is of this nature) will have a worse cost:benefit ratio for smaller issuers than it will for the banking groups that have dominated the debate so far.
Then linked to both this issue and the loudest voice issue - there is the foreign ownership of much of the banking system in many countries. If, as I suspect, the implications of the discretionary powers of resolution authorities on covered bond structures have not been fully worked out within many member states, even less so between member states. When a large, western European bank holding company goes through the resolution in a weekend process how much weight will be given to the needs of a covered bond issuing subsidiary in a small, third country? Not as much. I suspect, as if it were the main funding tool for the parent entity. And if that parent were to be in a country where covered bonds are systemically important.
Then there are the more technical issues. As Ive hit my limit for the length of these posts, these will have to wait for next time.
Hear more on this issue at our CEE Covered Bond Forum, taking place in London next week on Tuesday 23rd May. for more information, visit the event webpage.
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