European Central Bank officials said on Thursday that a covered bond label being finalised by the European Covered Bond Council should be sufficient and add value, but focused on ways in which it could be improved and pressed for timely implementation of the initiative, with the potential for negative consequences should it be delayed.

Speaking at a European Covered Bond Council plenary meeting in London, ECB director general for market operations Francesco Papadia said that he “very highly” appreciates the efforts that have been carried out so far, noting that the industry could have been complacent given that the asset class had fared better than others.

He welcomed how the “perimeter” of the label had been based on national covered bond legislations and supervision of the issuing institutions and cover pools, saying that the perimeter gets rid of the “grey zone” between covered bonds and other instruments. He also noted that a “broad” perimeter would allow the label to achieve a critical mass.

Francesco Papadia*

However, Papadia said that a broad perimeter conveys less information to investors – even if transparency mitigates this – and asked if the perimeter should be narrower. He said that limited comprehensiveness and comparability of national templates “may still be a source of concern” and that even if there are national discrepancies that explain these, they “cannot reduce the need for a common template”.

He said that once the label as currently envisaged by the ECBC is implemented, a higher level label could improve the risk characteristics of covered bonds and, since the ECB collateral framework continually strives to calibrate risk, covered bonds could gain – although he said that this was not a pre-commitment. Papadia said he could not make explicit commitments or forecasts and was “a dispassionate but interested observer”, but said that his advice could be seen as a reflection of the collateral framework.

“More work is needed in terms of homogeneity and transparency,” said Papadia, if covered bonds are to reach their full potential.

Some covered bond market participants have previously interpreted positive comments from ECB officials about the label as indicating that instruments carrying the label could be treated more favourably by the central bank. However, Papadia indicated that the label as currently proposed was a “defensive” move that could allow covered bonds to retain their current status.

His comments suggested that only a higher level label encompassing a narrower range of securities would likely lead to better treatment. Covered bonds backed by shipping loans were cited as an example of those securities that the ECB felt were inappropriate to be included in such a label.

The ECBC is targeting implementation of the label initiative at the start of 2013 and Michel Stubbe, head of the ECB’s financial operations services division, referred to this as a “deadline”. Some market participants interpreted the ECB officials’ comments as meaning that covered bonds could suffer if this target is not met for implementation.

Papadia’s comments were preceded by an update on the labelling initiative by ECBC chairman Paul O’Connor, as well as updates on work towards national templates from representatives of several jurisdictions, who also described how they would seek to build on these and satisfy the ICMA Covered Bond Investor Council’s transparency standards.

O’Connor said that while the ECBC had looked very closely at the idea of having a European transparency template, this was “just not possible” at the moment. He said that it is hard to define minimum European transparency standards given national differences, but that a commitment to transparency had been captured by the labelling convention.

He also said that one of the advantages of having differences between jurisdictions was that there would be an inevitable “race to the top”, with countries trying to improve, and better their competitors.

Papadia said that the ECB backs the ICMA Covered Bond Investor Council’s transparency initiative, and that efforts should continue for the ECBC standards to converge with those of the CBIC. He added that this would also reduce the administrative burden.

O’Connor had earlier said that if the industry sticks to “transparency, transparency, transparency, we won’t go far wrong”.

The label is a framework to build on, he said.

*Photo: © ECB/Martin Joppen