MEP Warns On Over-Reliance On Covered Bonds
Dow Jones Newswires
15 Jun 2011
Mark Brown
LONDON -(Dow Jones)- Encouraging banks to rely on covered bonds for funding risks sewing the seeds of the next financial
crisis, a member of the European Parliament's Economic and Monetary Affairs Committee said Wednesday.
Vicky Ford MEP, the U.K. Conservative Party's spokesman on Economic and Monetary Affairs, said on the sidelines of a
conference in Brussels that this could happen if regulators automatically treat all covered bonds as liquid, very low
risk debt when setting rules on how much capital banks and insurers must hold against the securities they buy.
This would support demand and encourage banks to use covered bonds to fund their lending, she said.
"If you hard wire that all covered bonds must be perfect, you are building the next crisis," Ford said.
Covered bonds are highly-rated bank bonds backed by a pool of mortgages or public sector loans which stay on the issuing
bank's balance sheet. Minimum legal standards are set to ensure that only good quality loans can be assigned to the
"cover pool" backing the bonds.
Issuance has grown since the financial crisis, as banks seek to fill the funding gap left by the shrinking of the asset-
backed securities market. The European Central Bank launched a EUR60 billion purchase program to support Europe's banks
in the aftermath of the collapse of Lehman Brothers.
But Ford warned that covered bonds should not be treated as homogeneous and said she backed a call by the U.K. for a
review of how covered bonds have performed in different countries.
She was speaking at the two-day Global ABS conference in Brussels hosted by the Association for Financial Markets in
Europe and conference organiser Information Management Network. ABS market participants have used the conference to
appeal for fair treatment from regulators.
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