The European Central Bank’s third covered bond purchase programme will start in mid-October and run for at least two years, ECB president Mario Draghi announced this (Thursday) afternoon, with its criteria looser than those of CBPP1 and CBPP2.

The ECB did not reveal the size of CBPP3 – previous programmes were Eu60bn and Eu40bn – nor did it reveal any aggregate figure for CBPP3 and an ABS programme that will run alongside it (which he said will start this quarter). Draghi merely indicated that a combination of the two programmes and the ECB’s TLTROs would have a “significant” impact on the central bank’s balance sheet and “stir” it towards the level it had at the beginning of 2012 – which has previously been taken to imply an increase of around Eu1tr.

Draghi said that the “potential universe” of securities that could be purchased under the ABS and covered bond programmes is up to Eu1bn – higher than most market participants have suggested. The ECB said in its press release that the programmes are expected to have “a stimulating effect on issuance”. The press release also slightly varied from Draghi’s statement on the start of the programme, saying it would begin in the second half of October.

Draghi said that the rules are designed to be as similar as possible to the Eurosystem collateral framework and the press release described this as the “guiding principle” for eligibility of assets for purchase.

“There will be some adjustments to take into account the difference between accepting assets as collateral and buying assets outright,” it added. “To ensure that the programmes can include the whole euro area, ABSs and covered bonds from Greece and Cyprus that are currently not eligible as collateral for monetary policy operations will be subject to specific rules with risk mitigating measures.”

As with the previous two purchase programmes, euro-denominated covered bonds will be purchased by the ECB and national central banks in the primary and secondary markets, according to the technical annex. The purchases will be “distributed across the euro area”, it said.

Excluding the special rules applicable to Greek and Cypriot covered bonds, the criteria listed, in the ECB’s words, are that covered bonds must:

– be eligible for monetary policy operations as defined in Guideline ECB/2011/14 as amended and, in addition, fulfil the conditions for their acceptance as own-used collateral as laid out in Section 6.2.3.2 (fifth paragraph, lit. (b)) of the same Guideline;

– be issued by euro area credit institutions; or, in the case of multi-cédulas, by special purpose vehicles incorporated in the euro area;

– be denominated in euro and held and settled in the euro area;

– have underlying assets that include exposure to private and/or public entities;

– have a minimum first-best credit assessment of credit quality step 3 (CQS3, currently equivalent to an ECAI rating of BBB- or equivalent).

The ECB also said that full retained issues are eligible for CBPP3 and separately that the Eurosystem will conduct an issue share limit of 70% per ISIN, except for Greek and Cypriot issues where the CQS3 rating requirement is not met, where the limit will be 30%.

“The Eurosystem will conduct appropriate credit risk and due diligence procedures on the purchasable universe on an ongoing basis,” said the ECB.

In line with developments over the previous programmes, the ECB will make available the CBPP3 portfolio for lending.

Regarding covered bonds from Cyprus and Greece that do not achieve the CQS3 rating, the ECB said:

A minimum asset rating at the level of the maximum achievable covered bond rating defined for the jurisdiction will be required for as long as the Eurosystem’s minimum credit quality threshold is not applied in the collateral eligibility requirements for marketable debt instruments issued or guaranteed by the Greek or Cypriot governments, with the following additional risk mitigants: (i) monthly reporting of the pool and asset characteristics; (ii) minimum committed over-collateralisation of 25%; (iii) currency hedges with at least BBB- rated counterparties for non-euro-denominated claims included in the cover pool of the programme or, alternatively, that at least 95% of the assets are denominated in euro; and (iv) claims must be against debtors domiciled in the euro area.

Photo: The Governing Council of the ECB in Naples today