Covered bonds are safe and resilient instruments that play a major role in financing the real economy and this needs to be preserved, but the industry should not shy away from innovation, with covered bonds arguably best understood as a technique rather than a brand, said a central banker at the ICMA CBIC-The CBR conference yesterday (Thursday).

Delivering the keynote address at the third annual Covered Bond Investor Conference, held by the ICMA Covered Bond Investor Council and The Covered Bond Report in Frankfurt, François Haas, deputy director general operations and director of financial markets operations, Banque de France, said that covered bonds are “one of the major success stories” of the European financial industry and that the soundness and quality of the asset class is recognised by favourable prudential treatment. Regulation also recognises the important role they play in financing the real economy, he said, citing the Bank Recovery & Resolution Directive (BRRD) and EU Green Paper on long term financing as examples.

But while covered bonds have developed a good reputation the covered bond industry has to keep pace with market developments, said Haas, with transparency needing to improve and legal frameworks updated.

In addition, he suggested that in the context of negative net issuance and pressure on the profitability of traditional covered bond collateral, the covered bond market should be more open to innovation, and offered a new way of thinking about what defines a covered bond.

“What is a covered bond?” he asked. “Is it a technique or a brand?”

Coming down on the side of technique, Haas said that in the context of challenges to banks’ ability to finance the real economy and investors’ search for diversification, covered bonds could have a role to play as an alternative means of financing of the real economy, with Commerzbank’s SME hybrid covered bond structure such a development in the covered bond market.

The covered bond industry should not fear a loosening of the product’s standard, he said, and although creating and monitoring SME cover pools requires more expertise there is scope for the covered bond technique to be applied to SME assets. The Cola working group of the ICMA Covered Bond Investor Council (which looks at covered bond “lookalikes”) has a role to play here, said Haas.

The instrument has an important role to play in a fast moving market alongside securitisation, which is reinventing itself, according to Haas.

“The covered bond universe is not intangible”, he said, and the industry “should not shy away from innovation”, although it is important that certain standards be preserved and others improved, such as transparency. In this context there is scope for the ECBC Covered Bond Label initiative and ICMA CBIC transparency template initiatives to converge and ensure that covered bonds continue to play a major role as a tool for financing the real economy.