José Manuel González-Páramo, member of the executive board of the European Central Bank, discussed the rationale behind launching a second, Eu40bn covered bond purchase programme in a speech on Friday, ahead of further details being released next Thursday (3 November).

He said the second covered bond purchase programme (CBPP2) is being launched because of significant pressure being placed on covered bonds due to the sovereign crisis, and because of the success of the first programme (CBPP1).

González-Páramo said covered bonds have a crucial role to play, particularly in European markets. He called the asset class the most important privately issued bond segment in euro area capital markets, with an integral role to play.

Because covered bonds represent a central funding source for euro area banks, he said, the covered bond market is an important determinant of banks’ ability to extend credit to their own customers.

He said the ECB ultimately decided to launch a second covered bond purchase programme because the sovereign debt crisis had led to the covered bond market coming under “significant pressure”.

“One of the innovative responses of our operational framework was the launch of our first covered bond purchase programme (CBPP1) in July 2009,” said González-Páramo.

The CBPP1 initiative was announced in May 2009 and Eu60bn of covered bonds were purchased between July 2009 and July 2010. It had had four objectives, he said: reducing money market term rates; easing funding conditions for credit institutions and enterprises; encouraging credit institutions to maintain or expand their lending to households and enterprises; and improving liquidity in important segments of private debt securities markets.

“The programme was successful in restarting activity in the primary covered bond market,” he said.

“CBPP2 shares with CBPP1 the objective of easing funding conditions and encouraging institutions to maintain or expand lending,” said González-Páramo, “as well as supporting market liquidity in private debt security markets.”