Covered bonds are unfairly propped up by regulatory authorities, proponents of asset-backed securities claimed at a securitisation conference in Amsterdam on Wednesday. An ECB official responded by saying that the two markets are important, but that the ABS industry needs to take the initiative.

Simon Collingridge, managing director, structured finance, at Standard & Poor’s asked for a show of hands on the different regulatory treatment faced by covered bonds and securitisation on the first day of the IIR European Securitisation Event 2011.

“Who would feel that covered bonds are disproportionately favourably treated in regulation?” he asked.

Nearly everyone in the room raised a hand.

When he then asked who believes that the disparity is at the correct level, this second question was met with just one or two of the 100 plus attendees raising their hands.

This attitude was reflected in some of the speakers’ messages. Monica de Vries, co-head retail secured structured securitisation at Lloyds Bank Corporate Markets, for example, said that there is “a strong bias” towards covered bonds.

“Australia and the US have more of a tendency to be more pro-securitisation,” she said. “But in Europe we favour covered bonds. Covered bonds are more liquid and investors have more certainty around the maturity date, and some bias is understandable.

“But it’s important to note securitisation is not a bad product. It has performed, from a credit point of view, throughout the crisis.”

Boudewijn Dierick, flow ABS and covered bond structuring at BNP Paribas, complained that ABS proponents constantly have to fight against this notion that covered bonds are “good” and ABS are “bad”.

“Some RMBS investors have even gone into covered bonds because of the new regulations,” he added.

Michel Stubbe, ECB

Michel Stubbe, head of the market operations analysis division at the European Central Bank – speaking as an expert without prejudging any decision of the ECB governing council – told the audience that both ABS and covered bonds were important to the market, and complementary.

“The cover pool of covered bonds is supervised and has to fulfil strict regulatory requirements, so we should start from this point of view that there is already more information on the composition available,” he said, “whereas in the case of the ABS, there is much more flexibility.

“In terms of the composition, we know that only certain types of assets can go into the pools of covered bonds, whereas ABS provide more freedom – which is also a strength of the product, of course. The crisis has also shown that there were important issues with the pool of the ABS, so there was also a lesson.”

He said that the ABS market had to take measures to improve its image.

“There is still an image problem with the ABS market,” he said. “Still, ABS remains vital for the banking sector.

“But there’s no miracle solution to get the ABS market started again,” he added. “It’s a combination of transparency, simplicity and standardisation, and industry initiatives, such as the PCS [Prime Collateral Securities].”

When asked if regulators could do more to promote securitisation, he said that the initiative would have to come from the market.

“I don’t think it has to come from the regulators,” he said. “I think it has to come from the industry, it has to come from you.”

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