A Dutch Ministry of Finance official today (Thursday) said asset encumbrance needs to be monitored and could be addressed in covered bond work under the Capital Markets Union project, while securitisation’s treatment should be eased despite it having been “contaminated” in the crisis.

Gita Salden, deputy director general of the treasury and director of financial markets, Dutch Ministry of Finance, made the remarks in a keynote speech at a European Covered Bond Council plenary being hosted by the Dutch Association of Covered Bond Issuers at ABN Amro’s headquarters in Amsterdam.

Explaining the backdrop to the Dutch market, she noted that the country’s real estate market is very specific, with high mortgage debt levels being maintained for tax reasons. With deposits unable to fund this, a funding gap opened up that Salden said explained the development of securitisation, which was initially the preferred funding instrument, with Dutch RMBS achieving a leading position globally. Covered bonds, meanwhile, originally played a more modest role.

However, securitisation became “contaminated” in the financial crisis, she said, even if losses hardly increased. This necessitated the establishment of a Eu200bn guarantee programme to help the market, according to Salden, something she said no-one in a finance ministry wants to have to do. Covered bonds were affected, but recovered much more quickly, she noted.

Salden said that three lessons had been learned from this experience. Firstly, there is a need for a diversity of funding instruments, she said, noting that an overreliance on securitisation leaves one vulnerable.

The second lesson, according to Salden, regards transparency. She said that a lack of transparency leads to the miscalculation of risk and can lead to panic. Work to improve transparency in covered bonds and also securitisation is therefore welcome, said Salden.

The third lesson she cited concerns collateral. Salden said that while collateral is a help, it is not a silver bullet in a crisis, as its quality can be affected and more can be required. In relation to this, she said that the ministry has some concerns about encumbrance and she said this needs to be monitored, particularly its interplay with the new bail-in framework.

Looking ahead to the Capital Markets Union, Salden said that creating a framework for high quality securitisation – one of the goals of the European Commission – is a priority. She cited remarks by European Central Bank president Mario Draghi regarding how asset-backed securities are discriminated against, and agreed with his comments, citing capital treatment and Liquidity Coverage Ratios as areas in which this is an issue.

Regarding harmonisation of covered bonds – another workstream of the Commission under its CMU goals – Salden said that there had already been a lot of movement in this direction and that she would probably take a critical view on harmonisation. However, she said that she would welcome her aforementioned encumbrance concerns being addressed in a manner similar to the “healthy ratio” approach taken in the Netherlands.

The country updated its covered bond framework at the beginning of this year.