Since the European Covered Bond Council began gathering data in 2003, the covered bond market has witnessed a decade of annual growth but in 2013 it started to shrink. According to the ECBC the outstanding amount of global covered bonds at the end of last year stood at €2.498tr, which was 0.25% lower than the year before.
The growth of covered bonds throughout the subprime and sovereign crises confirms its “anti-cyclical role,” said Luca Bertalot, secretary general of the ECBC and European Mortgage Federation.
The ECBC’s tally of global covered bond volume is widely considered the most comprehensive gauge of market activity and covers developments over the past 13 years for 31 countries. The trouble is that it does not discriminate between publicly syndicated supply, and covered bonds that have been retained.
Retained supply is especially important in peripheral European countries where issuers remain heavy users of the repo liquidity provided by the European Central Bank. Based on data provided by Dealogic which measures the amount of distributed bonds, retained supply amounted to just over 40% of the outstanding Spanish market and a little more than 60% of the Italian market last year.
The total volume of outstanding Italian covered bonds declined slightly from €131.2bn in the year to December 2014 compared to €130.5bn in the year to December 2015. Spanish covered bond volumes fell more steeply over the same period from €308bn to €280.9bn. The UK market also shrank, with volumes down almost €16bn in the year to about €121bn.
These falls were partly compensated with growth in the Canadian covered bond market, where supply rose almost €21bn to €85.6bn last year. In Switzerland covered bond volumes rose €11bn to €111.5bn equivalent. Growth has also been fuelled by supply from countries where legislation has been recently approved such as Singapore and South Korea.
Despite the high overall volumes, publicly distributed covered bond supply by European issuers fell from €167bn in 2011 to €127bn in 2014 and so far this year has amounted to €97bn, based on Dealogic data.
“Tougher capital requirements and the adoption of resolution measures, such as bail-in tools, have prompted banks to rethink funding strategies,” wrote Alexandra Schadow at LBBW research and Maureen Schuller at ING Bank research, in a report included in the ECBC’s 2015 fact book.
European banks now barely get a quarter of their annual wholesale term funding needs from covered bonds compared to 45% in 2011. Tougher capital requirements imposed on globally systemically important banks (G-SIBs) have been especially important in this respect, causing them to shift more markedly than other banks towards bail-inable debt at the expense of covered bond supply.
The authors said: “It is abundantly clear that issuance prospects for covered bonds will remain affected by the banking community’s focus on bail-in buffers” and banks are therefore advised to “to keep their valuable collateral powder dry, rather than issuing covered bonds to obtain a few basis points cheaper funding”.