30 September 2022
Good evening ladies and gentlemen and thank you for the invitation to speak here tonight. This is an important event for the covered bond industry, for the ECBC and also for the ECB. We feel that we are one of, if not fathers, then at least godfathers, of the Covered Bond Label.
This magnificent place here in Vienna could not be more appropriate to celebrate such a widely recognised traditional instrument as the covered bond, which has a high reputation already for centuries.
When Luca invited me to speak and I asked about his particular wishes, he told me that I can use all the time I need as long as I stay close to Fed Chair Powell’s Jackson Hole speech length. It was about nine minutes long. I promised to try, while paying tribute to this event from three perspectives: today’s, yesterday’s and tomorrow’s perspective.
First, today I want to congratulate you for your 10th anniversary of Covered Bond Label. We highly value the role of covered bonds in the European financial markets, as well as the role of the ECBC in constantly supporting this high-quality asset segment to become a more united and standardised in the EU and even beyond.
Your Covered Bond Fact Book states that the ECBC acts as the industry’s think tank, to drive market convergence and harmonise the industry’s best practises, to pursue efforts which have positioned the covered bond asset class at the centre of long-term funding strategies. Indeed, covered bonds have for centuries been an important funding tool for the banking sector, which plays a central role in EU financial markets.
In addition to our celebration of the 10th anniversary of the Covered Bond Label, the fact that 27 European countries have finalised the transposition of the Covered Bond Directive into national legislation, is another milestone in building a more harmonised Capital Markets Union. We hope this process can be now fully finalised without further delays.
Looking back, I personally learnt the basics of this asset class when I joined the EMI, the ECB’s predecessor in 1998. I was appointed to head the ECB’s planned small investment unit and given a task to develop an investment strategy for the ECB’s own capital, or own funds. During summer 1998 we received capital contributions from the 11 original member states and looked what other safe assets we could invest in – in addition to euro area sovereign bonds. Due its centuries’ long history of being a very secure asset class, German Pfandbriefe were a natural first non-sovereign asset class to choose, but as a European institution we wanted to cover all similar products in the euro area credit markets. I must say that it was not that simple to go through our legal and risk management processes with different type of French Obligations Foncières, Spanish Cedulas or Luxembourgian Lettre de Gage. There was a lot of debate with legal and risk management colleagues, but the list of euro area covered bond classes got steadily longer. Probably this process would be simpler and faster today, with the help of the Covered Bond Label.
You may also remember that the very first ECB asset purchase programme launched in 2009: the CBPP1. This EUR 60 bn purchase programme for 1 year aimed at supporting a specific financial market segment that was considered important for the funding of banks and that had been particularly affected by the financial crisis. After CBPP1 we had the CBPP2 and CBPP3, which is still ongoing; again demonstrating the continued importance of this segment.
However, as the ECBC has recognised, the world goes on and new developments and challenges call for adjustments to our instruments and policies. One of the new awakenings has been caused by climate change, which poses increasing risks to our economy and the financial sector.
The EU and European governments have come up with new programmes to address climate change risks and the urgently needed energy transition. When we at the ECB finalised our Strategy Review one year ago, our Governing Council decided to include climate change into all our considerations; be they analytical or operational, related to investment portfolios or monetary policy operations.
When dealing with climate change we, the ECB, are not a policy maker, but a policy taker, who wants to do their share in this field. With the Strategy Review we realised that climate change affects our primary mandate and that we need to take climate change risks into account to manage our balance sheet risks. We announced a Climate Change Roadmap in summer 2021 and we turned it into increasingly concrete actions this summer, starting for example in two weeks’ time with tilting our corporate bond purchases based on each issuers’ climate score.
Yet, the prerequisite for any climate related policy operation is to have access to adequate, relevant and harmonised data. In this context this also means climate or energy efficiency related data. We in the ECB’s Market Operations area are not regulators or supervisors, and cannot – and do not want to – dictate data reporting requirements from different companies. But we feel we could act as catalysts, like we did for the Covered Bond Label, and to support more uniform reporting templates and main EU financial products, taking into account new risks like climate change risk.
When we took a close look at our balance sheet assets last year, and at prevailing climate related disclosures on all of them, we felt that we have enough adequate data to start tilting our corporate bond purchases. Over time the CSRD will further improve corporate bond data with mandatory climate disclosure requirements. Corporate bonds, however, make constitute only a little share of total mobilised collateral, only 2-3%.
Instead, counterparties mobilise much more ABSs and covered bonds in their collateral pools, 15-20 times more or 40% in terms of total mobilised collateral. We have very little information on their climate change related risks, especially when it comes to assets backed by real estate mortgages. Moreover, to our genuine surprise, despite all the talk, we learnt that there are no concrete measures yet to make the climate change related exposures of these assets visible via harmonised and mandatory disclosures.
This has led us to get in contact with the relevant EU authorities, in particular ESMA for ABSs and EBA and the European Commission for covered bonds, to discuss with them our ideas for better and more harmonised disclosure.
In this respect we aim again to act as a catalyst for improving transparency within the European legislative framework in close cooperation with these other European institutions. Better disclosures for covered bonds are essential for us as a policy maker, an investor and a collateral taker, as well as for all other investors.
So when thinking about the future of European covered bonds and the role of issuers and legislators I would like to put forward three considerations:
In this regard, we can already commend the ECBC and the EMF for their efforts in driving for better disclosures, through the use of Harmonised Transparency and Disclosure Templates. Your templates have been a reference in the last decade, providing data of increasingly good quality. They help banks to set up internal reporting infrastructure, and could pave the way for even more systematic and harmonised reporting requirements including climate and energy efficiency considerations.
To conclude, I would like, once more, to congratulate the ECBC for the 10th anniversary of the Covered Bond Label and wish all the best to keep these traditionally prestigious assets updated to meet the challenges of the 21st century. If needed, we stand ready to help. Good luck with your continuous endeavour!