Covered Bonds in a post-CBPP3 world

Bernd Volk, Deutsche Bank

Quantitative Easing (QE)” is the term central banks use to describe purchasing assets with newly created money leading to an expansion of their balance sheet. On 4 September 2014, the ECB announced the third Covered Bond Purchase Programme (CBPP3). The goal of CBPP3, as part of the broader ECB Asset Purchase Programme (APP), is to “enhance the transmission of monetary policy”, “support credit provisions to the real economy” and, most importantly, increase the Harmonized Index of Consumer Prices (HICP) to “below, but close to, 2%”. The ECB Governing Council clarified in 2003 that “in the pursuit of price stability it aims to maintain inflation rates below, but close to, 2% over the medium term”.

On 22 January 2015, the ECB announced the main part of its APP, the Public Sector Purchase Programme (PSPP). In total, the ECB APP consists of the PSPP, the CBPP3, the Corporate Securities Purchase Programme (CSPP) and the Asset Backed Securities Purchase Programme (ABSPP). In October 2014, i.e. before PSPP was announced, the ECB started purchasing covered bonds. Besides significantly increasing asset prices in the euro area, the HICP increased in recent months as well. Moreover, “asset scarcity” (for example, the ECB already holding 35.5% or EUR 84.7bn of the outstanding stock of the PSPP eligible ESM/EFSF debt as of  23 June 2017), led to expectations regarding “tapering”, i.e. that the ECB would further reduce its combined monthly asset purchases from the EUR 60bn applied since April 2017.