Do you think covered bonds are living up to their reputation as a rainy day product?
For the private sector, covered bonds have proved a rainy day product, allowing issuers to fund in longer maturities and at more interesting spread levels versus other assets. The covered bond market will be an important driver of economic recovery, whether that will be through retained issuance for emergency liquidity backstop lines or real term funding.
The French banks opened the market in Europe in March, which was exactly what happened after Lehman Brothers collapsed in 2008. Of course the crisis we face today is very different from 2008: it’s not a financial crisis but a real economy crisis.
A lot of work has been done by various European financial institutions, which are now better capitalised due to banking union and regulatory reforms, so they’re starting from a much stronger position.
Today, the banking sector represents part of the solution. [It is] able to support the real economy towards the recovery. The [European Central Bank] and other central banks have provided a large and reliable funding line, which means there is likely to be less dependency on market-based funding — even though it is open and there ready to be used.
Can you tell me about the EMF-ECBC's Covid-19 task force?
No one really knows how the crisis will change the market, so we decided to take a kind of scientific approach in the covered bond space by creating a task force to monitor the global mortgage market developments, gather statistics and bring together various government measures into one place.
The task force is composed of retail, funding and investment bank representatives for each jurisdiction, and it will meet, virtually, at least once a week for as long as is necessary. The task force will identify market best practices and solutions with a view to delivering a coordinated recovery plan.
What sort of information does the monitoring report contain?
The monitoring report gives an overall picture providing an outline and signposts to the major policy measures that have been instigated by institutions like the European Central Bank, European Banking Authority (EBA), the Bank for International Settlements and the European Commission. It also sets out the various measures allowing mortgage holidays, mortgage moratoria and state guarantees.
This is presented as a grid to help improve informational exchange. It also provides a helpful guide for countries considering implementing new measures. There’s also an extensive annex which sets out official announcements from various government agencies, and a second annex covering mortgage housing statistics, such as data on loan-to-value ratios, average time to foreclosure and current mortgage arrears.
Can you tell me about the enhancements recently made to the harmonised transparency template (HTT)?
In April we began work refreshing the label website to improve transparency in broad sense. This effort is being mirrored with the energy efficient mortgage label which tags green loan assets, as well as green funding. We’ve developed a new tool to capture key information on the asset side within the cover pool to present data in a standardised way using pie charts and histograms. We expect this to facilitate investor due diligence and enable comparative analysis of different issuers in different countries. In essence the new HTT tool provides an informational bridge to view heterogeneous cover pool data in a standardised and comparable homogenous format.
Could the updated pool information be used to show payment holidays?
It is very clear that the HTT could help to rapidly provide transparency to investors, and we are planning to introduce a new tab which will supply information on loans that have been effected by national mortgage moratoriums and payment holidays.
We’re hoping to put this on a fast track and have everything agreed by the label committee meeting on June 4. We are coordinating action to ensure that the high quality of cover pools is maintained, so covered bonds can help to secure the economic recovery, and we are in discussions with various national authorities about what action can feasibly be taken.
The EBA says loans more than 90 days overdue should not be counted as delinquent. Is there any view in the covered bond industry how this could be accounted for in the cover pool with respect to the asset collateral test?
This will be part of our response. We are digesting what’s going on and speaking to the EBA to see what’s feasible and work out the best way forward.
Do you think the public sector covered bond market can be reinvigorated to respond to the current crisis with a new stream of stable funding for municipalities and local authorities?
I think so. In 2003, the public sector represented 80% of the German Pfandbrief market, as it was used to support an unprecedented effort to reunify Germany. Nowadays it’s other way around, with less than 20% of the market used for public sector funding. But what we see more and more is that the economic recovery cannot be managed by the SSA and sovereign sectors.
We can see from the debate taking place around the German Federal Constitutional Court ruling that there is a need for a strong private sector that is able to support the recovery alleviating pressure on public debt.
We believe covered bonds can play an important role in the roadmap to the European Green Deal. As Caffil has demonstrated with its Covid-19 covered bond, which secures funding for the French healthcare system, the public sector covered bond market is a financial instrument at the disposal of many financial institutions which has demonstrated a successful track record of funding economic recovery.
What is the potential role for European Secured Notes (ESNs) in the recovery?
ESNs had become a little impractical, as using this funding had not made much sense when spreads were tight. But now, with the widening of covered bonds to senior unsecured, ESN funding is back on the table as an option. SMEs are a major driver of employment and growth in Europe, so bringing funding and liquidity to them is considered a bankable priority for the European Commission.
We also believe there is scope for ESNs to be developed with a green connection and have something like the Lettres de Gage énergies renouvelables project. We’ve set up an ESN Task Force, that will be looking closely into this market and though most national regulators will be paying close attention to the implementation of covered bond directive, we also see that some regulatory authorities still have the ESN question in the forefront of their minds.
What is the potential for energy efficient mortgages?
It is important for EU citizens to live in good quality housing, as this is where they are likely to spend most of their lives. The energy efficient mortgage initiative is an ambitious project that connects all EU citizens with the desired aim of improving the quality of housing, and at the same time requalifying the energy efficiency of the entire building stock of the EU.
We recently finalised a new Energy Efficient Label Foundation that works in the same way as the Covered Bond Label, by granting labels on energy efficient mortgages and bonds, based on self-certification. Issuers will be able to declare a certain amount of energy efficient mortgages and provide full transparency using harmonised disclosure templates.
Depending on the impact of Covid-19, we hope to be fully operational by December with 57 pilot phase banks involved in the energy efficient label expected to take further action in the process towards developing and rolling out origination platforms for energy efficient mortgages — thereby creating a constellation of national banks that can take advantage of funding that’s being made available under the European Commission’s Horizon 2020 programme.
We are entering into a new green paradigm, with energy efficient mortgages and green ESNs potentially becoming flagship products under European Commision vice-president Frans Timmermans’ roadmap for transitioning the EU’s economy towards carbon neutrality.
Do you believe implementation of the covered bond directive might be delayed?
Our covered bond directive task force is checking the state of play among the various European jurisdictions and although nothing official has been announced, it’s clear Covid-19 has changed everything and it’s possible that implementing the covered bond directive will come lower down on the list of their priorities.