Ladies and gentlemen,
It’s a great pleasure to welcome you to this conference. I’m glad to see so much interest in the work we're doing on covered bonds. It is of course part of our broader push to build a single market for capital in Europe.
Our goal with the CMU is to help money flow throughout the EU to where it's most productive. It's to connect savings effectively to growth, to channel investment to projects which need financing, to give all companies a greater choice of funding, and to increase the options for people saving for the long term.
As part of this work, we're taking forward a proposal to revive securitisation markets, so that we can free up bank lending to the wider economy. We've acted to support longer-term investment in infrastructure. We are working on measures to encourage venture capital. And we're also reviewing the legislation that was put in place in response to the crisis, to check whether, taken in the round, it's working as intended. Our call for evidence has just ended. We'll now go through the hundreds of detailed pieces of evidence we have received.
Today's conference on covered bonds therefore fits into that much broader context. I want to look at what's working well and see how we can share best practice. At how we can attract more investors and overcome the barriers to investment across European borders.
We’ve had a good response to the consultation that ended last month. We've collected views from covered bond issuers and investors, as well as rating agencies, supervisors, and governments. We’re now busy working through them. Pulling out the facts, weighing up the evidence, and completing the analysis that will determine our approach to strengthening this market in Europe.
But let me say a little bit more about why we launched the consultation, and give you a flavour of the responses we’ve received.
As you all know, the European covered bond market is a vibrant one. It plays an important role in our economy and in long term financing in the EU. It’s supported by a solid investor base, and in recent years, it's provided a reliable source of funding to banks and other lenders when the appetite for other types of debt dried up. Covered bond issuance has grown steadily. In 2014, outstanding EU covered bonds exceeded 2.5 trillion euros, with the lion’s share of the global market made up by seven member states.
In many countries, covered bonds underpin the housing market. They provide the funding for 20% of mortgages in Europe. In Denmark, mortgages are almost exclusively funded in this way. The commercial and residential real estate sectors of a number of other member states –including Germany, France and Spain – are heavily dependent on covered bonds. Large public infrastructure projects have also often relied on this source of financing.
But although Europe's covered bond market is strong, the crisis raised some questions.
For example, the cost of covered bonds started to vary significantly between different member states. As housing bubbles burst, the value of the underlying assets – the bricks and mortar used as collateral - declined. And as markets readjusted their assessment of sovereign risk across Europe, they also changed their assessment of risk in the covered bond markets.
Overcoming the barriers to the free flow of capital to improve funding options for businesses in Europe goes to the heart of what we're trying to achieve through the Capital Markets Union.
So that's why we launched this consultation. To understand the causes of this market fragmentation better, and to see whether we could do anything to prevent it. I thought it was sensible to act on the European Banking Authority's recommendation that further convergence of national covered bond frameworks would be beneficial if we could build on best practice.
So while we're still working through the consultation, let me respond to a few themes that have already become clear.
Most respondents thought the greatest cause of market fragmentation was not the difference between national covered bond frameworks. For them, this had more to do with a decline in property values and mortgage markets, and the sovereign debt crisis. Many thought this made some market fragmentation inevitable.
Respondents have also emphasised that national frameworks for covered bond markets are largely working well. Tight legislative and supervisory frameworks play a valuable role in maintaining covered bonds as attractive, low risk and liquid investments. Bond holders enjoy dual recourse, meaning they can claim against the lender, and in case of insolvency, directly against the collateral as preferential creditors. Securities supervisors keep a close eye on collateral pools and make sure the requirements for collateral continue to be met, and that assets are always greater than liabilities.
So my aim is not for covered bond prices to be the same across Europe or to have one harmonised framework. Rather I want to build on national covered bond markets that work well. My goal is to see whether the experience, expertise and best practice that countries like Germany, Denmark or France have built up over the years, can be used to create a more integrated market. In particular, I want to look at whether there are unnecessary legal barriers or differences that stand in the way of investment in covered bonds across Europe.
The diversity of covered bond products that flows from the different national frameworks is something that is widely valued. This is again a theme we've picked up in your responses. I too value that diversity and it is something I want to preserve. There needs to be enough flexibility in the system for new products to be developed in different markets.
Yet many responses also call for minimum quality standards or principles for covered bonds that could help improve both market discipline and efficiency, and to benchmark covered bonds more accurately between Member States. So I do want to look into whether there is scope to build on what we have already without disrupting existing markets, and help investors compare products, assess risk and invest more outside their own country.
More consistent disclosure practices could help investors price covered bonds more accurately, on the basis of the issuer's financial strength and the quality of the cover pool. And we're keeping a close eye on market-led initiatives to improve transparency in the market as part of our assessment.
The simplification and standardisation in market practices in Europe could help make covered bonds markets more liquid for all member states. It could also reduce the costs and the time currently needed to undertake separate analysis for the covered bonds of each Member State and their different legal frameworks – something that's particularly important for smaller investors.
It's through this lens that we'll be approaching further work on covered bonds. In the coming weeks we'll be looking in more detail at the responses we've received, deepening our analysis, and seeking further advice before deciding whether action is needed, and what form that might take.
I am looking forward to hearing about the outcome of the discussions that you will have during the course of today. The results of these discussions will help shape what we do. So I would encourage you to be candid, to share with us the situation as you see it. And, to come forward with your suggestions on how we can build on what we have, replicate best practice and break down the barriers to investments across Europe in this market.