Throwing back the covers

IFR Pfandbriefe Covered Bonds 2008
4 min read

The ECBC is the chief cheerleader for the covered bonds industry in Europe, its spiritual home, but is also working hard to stimulate activity in countries markets where covered bonds have not traditionally been found. It has certainly been a busy year for the association, which has had to wrestle with a number of issues affecting the market, as Solomon Teague found out.

The European Covered Bond Council (ECBC) was formed by the European Mortgage Federation (EMF) in November 2004. It has over 90 members from 16 different European countries, covering many different market segments. The group claims to represent around 85% of all covered bond issuers.

According to the ECBC, the onset of the credit crunch has exacerbated a number of fault lines that had started to appear in the patchwork of the international covered bond industry.

As the problems tightened their drip on the global economy, the ECBC’s response was to form the 8-to-8 Issuers and Market-Makers Committee, bringing together the eight biggest issuers from the eight largest covered bond issuing countries, with the eight investment banks comprising the industry’s market-making community.

The committee is illustrative of the modus operandi of the ECBC, which has set itself up as a forum for the different players in the industry to discuss various issues. Besides the 8-8 Committee, since inception the ECBC has created six working group committees which represent the main challenges and issues it has identified as issues the collective covered bond industry needs to address: EU Legislation, lobbying the European Commission, Council and Parliament; Technical Issues, looking at things such as the use of derivatives in the covered pool; Statistics and Data, responsible for publishing market data on the industry; Covered Bond Fact Book, responsible for communicating developments in the industry; Rating Agency Approaches, which monitors the treatment of the industry by the rating agencies; and Market Related Issues, assessing problems like those around market making – the committee that has seen the most publicity since the credit crunch took hold.

The most pressing single issue facing the industry – one that is touched upon by several of the committees – is the need to repair the secondary market, principally by restoring confidence through the creation of a stable market-making practice, to support transparency and liquidity and support the primary market, according to Luca Bertalot, head of the ECBC.

Another issue at the heart of the ECBC’s work and running through that of all its component committees is the lack of standardisation, let alone harmonisation, in the various national covered bond industries constituting the global market. “Covered bonds are a very European product, and there is a long tradition in the different countries – such as Pfandbrief in Germany, Realkreditobligationer in Denmark, Cédulas Hipotecarias in Spain and Obligations Foncières in France,” said Bertalot.

This has led to differences that predate the more recent efforts of European financial integration, for example in the legal framework underpinning the mortgage market, which in some countries is based on common law, and in others in court legislation. Such differences will only grow more pronounced as the covered bond industry gains traction in more countries.

Monitoring the developments of the covered bond industry in countries where it has not existed traditionally is a key function of the ECBC. Japan and the US are embryonic covered bond markets that look set to grow considerably over the coming years. But there is also activity in other markets from Mexico to Azerbaijan.

In order to maximise harmony in an industry already suffering its share of discord, the ECBC cannot simply observe and document the progress in different countries; it has been working together with US institutions like Washington Mutual and Bank of America to help them develop something compatible with what already exists in Europe.

Notwithstanding the problems the ECBC has wrestled with, covered bonds have fared reasonably well, compared to many other asset classes, said Bertalot. The case can be made that the credit crunch has strengthened the position of the industry, relative to other markets like securitisation. The covered bond industry is in a position to fill at least part of the vacuum left by the slow down of securitisation, Bertalot said.