FAQ on covered bond purchases under the Eurosystem’s monetary policy purchase programmes
Updated on 13 February 2024
On 15 June 2023 the Governing Council decided to discontinue reinvestments under the asset purchase programmes (APP) as of July 2023. On 14 December 2023 the Governing Council announced that it intends to continue to reinvest, in full, the principal payments from maturing securities, including covered bonds, purchased under the PEPP during the first half of 2024 and to reduce the PEPP portfolio by €7.5 billion per month on average over the second half of the year. At the same time, the Governing Council announced that it intends to discontinue reinvestments under the PEPP at the end of 2024. The considerations and criteria outlined in this FAQ continue to apply to any covered bonds that can be purchased under the PEPP.
Q1.1 What are the maximum and minimum maturities of covered bonds eligible for purchase?
No maximum or minimum maturity has been defined.
Q1.2 What is the minimum issuance volume of covered bonds eligible for purchase?
No minimum issuance volume has been defined.
Q1.3 How is a covered bond treated if it has two or more ratings? Which rating do you use?
If multiple, and possibly conflicting, ECAI assessments are available, i.e. external credit ratings provided by any of the four external credit assessment institutions, or eligible credit rating institutions (namely S&P, Fitch, Moody’s and DBRS), the first-best rule is applied.
Q1.4 The eligibility criteria foresee that only securities accepted for own use can be purchased. Can you confirm this and also describe the treatment given to multi-cédulas?
In principle, all covered bonds that comply with the eligibility criteria established in Part Four of Guideline ECB/2014/60 are eligible. The rules for the own use of covered bonds are set out in Article 138 of the Guideline.
Concretely, this Article states that the Eurosystem exempts specific debt instruments from the “close links” rule. As such, covered bonds can be “own-used” as collateral (with the exception of intragroup pooled covered bonds) by the issuer (or by a closely linked counterparty) if they comply with the CRD/CRR. The actual or potential inclusion of government-guaranteed bank bonds in a pool of covered bonds pursuant to Article 139(1)(b) of Guideline ECB/2014/60 does not affect the eligibility of such covered bonds for own use. Since 1 February 2020 covered bonds have only been eligible for own use if they have an ECAI rating. Multi-cédulas are considered eligible for covered bond purchases as clarified in the Decision ECB/2014/40.
Q1.5 Are registered covered bonds (e.g. German Namenspfandbriefe) part of the investible universe?
Namenspfandbriefe are not eligible under the Eurosystem collateral framework, as these instruments do not meet the criterion that a debt instrument must be transferable in book-entry form (Article 67(1) of Guideline ECB/2014/60). Instead, the transfer of a Namenspfandbrief usually takes the form of an assignment, as the owner is registered in a separate register.
Q1.6 Does the prohibition of monetary financing, as laid down in Article 123 of the Treaty on the Functioning of the European Union, have to be respected in terms of purchases of covered bonds issued by publicly owned credit institutions?
Covered bond purchases made under the CBPP3, which are monetary policy operations and constitute supply of reserves, make no distinction between covered bonds issued by public sector credit institutions and those issued by private sector institutions. This is in line with the provisions of Article 123(2) of the Treaty.
Q1.7 Does the issue share limit of 70% apply only to CBBP3 holdings?
No. The 70% limit applies to the combined covered bond holdings of the Eurosystem’s monetary policy purchase programmes and the Eurosystem’s investment portfolios.
Q1.8 Why are conditional pass-through covered bonds no longer eligible for purchase?
The Governing Council decided to exclude conditional pass-through covered bonds from purchases under the CBPP3 as of 1 January 2019. The decision reflects the somewhat more complex structure of these bonds, whereby some predefined events may lead to an extension of a bond’s maturity and to a switch in the payment structure.
The decision was taken in the context of the CBPP3 and has no consequences for the eligibility of conditional pass-through covered bonds in the Eurosystem collateral framework.
Q2.1 Why would a bank sell retained covered bonds to the CBPP3 when they can be placed at the ECB for repo purposes?
It is up to individual institutions to manage their own funding sources, including liability structure, maturity breakdown and any decision between the market placement and retention of bonds.
Q2.2 Does the issue share limit of 70% per international securities identification number (ISIN) also apply to “fully retained” issues?
Q3.1 Does the Eurosystem share income and losses generated by covered bond purchases under the CBPP3?
Q3.2 Does the Eurosystem apply any specialisation in purchases across jurisdictions and maturities?
For efficiency reasons, the Eurosystem’s internal decisions on the allocation of particular purchases to its members take due account of their specific competencies.
Q3.3 Can asset managers and non-bank financial institutions offer assets eligible for purchases under the APP and the PEPP?
Asset managers and non-bank financial institutions are not eligible counterparties. However, the Eurosystem offers its eligible counterparties the possibility of sharing offers of eligible securities on behalf of non-eligible counterparties, such as asset managers and non-bank financial institutions, under the asset purchase programme (APP) and the pandemic emergency purchase programme (PEPP). Although final responsibility for the offered assets remains entirely with the eligible counterparties, they can include them in the daily inventories of assets they share with the Eurosystem, either by explicitly reporting which assets are offered on behalf of non-eligible counterparties or by aggregating them with their inventories. In periods of heightened investor uncertainty, such as during the coronavirus pandemic, this option can contribute to alleviating market tensions and supporting proper market functioning.
Q4.1 Under the CBPP3, the Eurosystem was able to buy up to 70% of a covered bond issue per international securities identification number. In the case of the remaining 30%, are these eligible for Eurosystem repo purposes, assuming they meet the covered bond requirement criteria?
If all eligibility criteria are fulfilled, the remaining outstanding amount of the covered bonds can be used as collateral in Eurosystem credit operations.
Q5.1 Where on the ECB’s website can I find a list of the Eurosystem’s current holdings of covered bonds?
Information on covered bond holdings under the Eurosystem’s monetary policy purchase programmes is provided in the section on asset purchase programmes.
Q5.2 Does the Eurosystem act as a “regular” investor when conducting covered bond purchases under the monetary policy purchase programmes?
The Eurosystem purchases covered bonds at prevailing market prices.
Q5.3 Covered bond purchases may crowd out private sector investors. The covered bond market also has no structural deficiencies and is thus clearly not in need of yet another ECB purchase programme. Why have you nevertheless decided to buy covered bonds?
Covered bonds have some features that are important from a monetary policy perspective.
First, the link on the issuing bank’s balance sheet between the covered bond, on the one hand, and the loans that back the covered bond, on the other, is reasonably tight. As the prices for covered bonds increase, we expect banks to respond by originating more covered bonds and thus more loans to collateralise them.
Second, outright interventions in this market will complement other purchases by reinforcing the portfolio rebalancing channels of monetary policy transmission and generating positive spillovers into other markets and securities. This will further ease funding and credit conditions.
Third, taken together, the Eurosystem’s non-conventional measures should be seen as complementing one another, strengthening the combined impact on liquidity and the economy. Finally, purchases take due account of market functioning.
Q5.4 Why did you switch from a daily publication of covered bond purchases to a weekly one?
The ECB decided to harmonise publication practices regarding the different monetary policy portfolios. For the covered bond purchase programmes and the asset-backed securities purchase programme in particular, the publication practices already in place for the Securities Markets Programme were adopted to ensure greater consistency. The weekly publication of the settled amounts is consistent with the weekly release of the consolidated financial statement of the Eurosystem.
Q5.5 Could the Eurosystem have preferred creditor status for the monetary policy purchase programmes?
There is no legal basis on which the ECB could either claim or enforce preferred creditor status in the event of a default on covered bonds it has purchased under the Eurosystem’s monetary policy purchase programmes. That said, covered bonds qualify as senior secured debt, which under Article 38(1)(b) of the Bank Recovery and Resolution Directive is explicitly exempt from any bail-in measure in the event of bank resolution.
Q5.6 There have been an increasing number of consent solicitations in the covered bond market with issuers asking investors to approve changes to the terms of outstanding bonds or specific programme details. Given the Eurosystem’s large presence in the covered bond market, has it adopted any general stance towards consent solicitations?
The Eurosystem has noted the increasing number of consent solicitations in the euro area covered bond market and has continued to thoroughly examine the merits of each individual case in developing a consistent approach towards such consent solicitations.
The Eurosystem normally aims to adopt a neutral approach towards consent solicitations thereby facilitating a market-based decision on the changes proposed. Furthermore, the Eurosystem is of the view that improvements could be made to two features of the consent solicitation process:
- The Eurosystem has reservations about the practice of only paying the consent solicitation fee to those bondholders who vote in favour of the proposal. Such an approach is viewed as inadequate. Rather, the Eurosystem is of the view that any such fee should be paid to all bondholders when changes are approved, to compensate all bondholders for the impact of those changes.
- Efforts to make the consent solicitation process more transparent (for example, more precise data on voter participation) should be considered.
Q5.7 Can the Eurosystem participate in private placements?
Since March 2023 the Eurosystem has not been able to participate in private placements.