30 years: Capital markets & covered bonds
There is a lot of discussion about introducing new types of covered bonds backed by different asset classes. To distinguish this idea from traditional covered bonds, most people refer to the proposed bonds as European Secured Notes or ESNs. In this video, Richard takes a look at the prospects for the European Secured Notes market and what it might look like.
There is a lot of discussion about introducing new types of covered bonds backed by different asset classes. To distinguish this idea from traditional covered bonds, most people refer to the proposed bonds as European Secured Notes or ESNs. In this video, Richard takes a look at the prospects for the European Secured Notes market and what it might look like.
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7 mins 40 secs
Covered bonds are traditionally backed mainly by residential mortgages and public-sector loans. However, European Secured Notes are new types of covered bonds that are backed by loans to small and medium enterprises.
Key learning objectives:
Explain the new asset class and its disadvantages
Identify cases whereby ESNs have been mirrored before, and the people most likely to use it today
Describe the structural differences between ESNs and traditional covered bonds
Outline the success prospects of ESNs and what it depends on
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There have been a handful of deals that look a bit like ESNs. These are the following:
Loans to small and medium-sized businesses will be used as collateral for covered bonds. These loans are typically relatively safe and granular – and therefore, the pool isn’t exposed to any single large risk and there are plenty of them. European Banks hold about 3 trillion euros of this asset.
The success of European Secured Notes depends on a wide array of variables – one being the regulatory treatment it receives. If ESNs get preferential treatment as it is the case for covered bonds, we will likely see it flourish. For example, the exemption from bail-in under bank resolution rules.
It also depends on whether ESNs are supported and backed by the European Commission and Parliament.
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