ECB’s tighter unsecured limit raises onus on covered
The European Central Bank yesterday (Wednesday) further limited the amount of funding financial institutions can raise from it against unsecured debt instruments, potentially increasing the importance of covered bonds as an alternative source of collateral. Meanwhile, a Pimco executive suggested a second round of covered bond purchases as one tool the ECB could use to stimulate the European economy.
The ECB lowered the proportion of funding financial institutions can raise against unsecured debt instruments from 10% to 5% of the total collateral they submit.
“Banks need to have instruments to access the ECB,” said Bernd Volk, head of covered bond research at Deutsche Bank. “The simple fact that banks need collateral to access the ECB and now can make less use of senior bonds of closely linked entities means covered bonds may become more important.
“Given the current market conditions, you don’t have to be a scientist to know that ECB funding is very important; it seems clear that some deals will have to be done through the ECB.”
There has been no new euro benchmark covered bond issuance since Eu1.25bn BPCE SFH and Eu1bn Abbey National Treasury Services issues on 1 September.
“What this means it that a lot of these deals will be done behind the scenes again,” added Volk.
He said that government guarantees for bank debt no longer being in place might also contribute to covered bonds increasing in importance.
“So many state guaranteed bonds are coming due and there is no market for almost anything at the moment,” he said, “and you have some collateral (with less harsh rating requirements compared to ABS) if you have covered bonds for ECB funding.”
The ECB also abolished the requirement for collateral assets to have a listing yesterday, although this mainly affected ABS and does not affect covered bonds as they were already exempt from the criterion.
CBPP II?
Andrew Bosomworth, executive vice president and head of portfolio management in Pimco’s Munich office, raised the possibility of a renewed round of covered bond buying as one tool the ECB could employ alongside its Securities Markets Programme to loosen monetary policy as growth prospects deteriorate. He argued that with Europe’s banks having difficulty channelling credit into the real economy and peripheral sovereigns’ fiscal policy being neutral or pro-cyclical, the ECB at a minimum has to cut interest rates.
“It could also restart buying covered bonds now that the market is teetering on the verge of closure,” added Bosomworth. “And now that it has started buying Spanish and Italian government bonds, it cannot quit. To quit would likely push these countries to the verge of default. Arguably, that is what is needed to prompt reform.
“Whatever the ECB decides, however, its actions can only be a bridge to a destination shaped by governments’ fiscal and growth policies.”
The ECB ended a previous, year-long Eu60bn covered bond purchase programme in June 2010. The programme was part of a package of unconventional policy measures from the ECB, which always maintained that the CBPP did not represent quantitative easing.