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Good morning, and thank you for inviting me to speak here today.
And I’d like to thank the European Covered Bond Council for organising such an important event.
As everyone here knows, covered bonds are of large and growing importance to bank funding and capital structures across Europe.
In the wake of the crisis, with uncertainty in financial markets, and volatile funding costs, covered bonds play an increasingly vital role in providing a stable funding base for banks across Europe.
And by providing stable funding for banks alongside other tools such as securitisation, covered bonds play a critical role in supporting sustainable lending to the real economy.
Helping ensure that the financial sector can continue to provide the lending that businesses need to invest and grow.
Helping in particular, those small businesses that rely most heavily on bank lending and debt finance.
After all, it’s the success of our private sector entrepreneurs and businesses that are critical to securing our economic recovery, and we are committed to ensuring that they are able to access the credit they need.
Last year we did this through Project Merlin, and secured £190bn of gross new lending to businesses, including over £74bn to SMEs.
And last week we launched the National Loan Guarantee Scheme, which will help smaller businesses across the UK access cheaper finance.
We also expanded the Business Finance Partnership by another £200m, providing a total of £1.2bn to stimulate the development of non-banking channels.
And we have welcomed many of the recommendations made in Tim Breedon’s report on boosting finance for small businesses.
That includes supporting work by industry to consider the potential for aggregation models to facilitate access for SMEs to the public bond markets.
Of course, the banking sector will remain the principal source of finance for many businesses across the country.
That’s why in the longer term it is critical that we build a stable and successful financial sector that can channel the funds of savers to investment opportunities, transform our bank deposits into loans and help businesses and individuals manage risk appropriately.
Building that system means reforming and remedying the failures that preceded the financial crisis.
A crisis that has come at great cost to us all through rescuing failed banks, and providing in excess of three trillion Euros in guarantees and support across Europe.
We are all too familiar with the costs that come from the lasting damage that can be wrought by inadequate regulation.
That’s why we are committed to reform that secures a stable and successful financial sector with a global outlook.
A sector that provides sustainable lending, supports sustainable growth, a sector that doesn’t put our wider economic stability in jeopardy.
And when it comes to the covered bond market, we have to build a regulatory regime capable of monitoring and mitigating potential risks in the market that could jeopardise long term sustainability.
In particular, it is essential that we embed high, minimum standards for transparency and asset quality in the Covered Bond market.
The financial crisis vividly exposed just how little we knew about some of the most prevalent and systemic instruments and risks in the market.
Issuers failed to disclose adequate information to investors…
Investors relied too heavily on the opaque opinions of rating agencies. And, as we know, those rating agencies failed to provide robust and credible risk assessments.
It is disclosure that drives market discipline and enables the market to make a more informed appraisal of prices and risks.
And it is disclosure that promotes stability, by reducing uncertainty and unfounded speculation.
That is why it is imperative that investors have access to all relevant information about covered bonds, including data on the underlying loans in the cover pool.
And we in the UK have been at the forefront of that ambition.
Providing greater certainty to investors through the high levels of transparency provided by UK issuers, the consistent quality of assets in UK covered bond pools, and the success of the FSA’s robust stress testing regime.
It’s because of those qualities that the UK market has gone from strength to strength since the first UK regulated covered bonds were issued in 2009.
There are now 12 registered users of regulated covered bonds in the UK, with £31 billion issued by UK firms in 2011, an increase of £11 billion on 2010.
Growth which capitalises on the strengths of the UK covered bond regime.
And last year we took steps to strengthen that regulatory framework even further.
We consulted on proposals to raise transparency in the UK covered bond market, and make the UK regime more readily comparable with European peers.
I am grateful for the feedback and input we received from a wide range of market participants, including many of you here today.
It’s because of that engagement we made a number of changes to our regulatory framework:
- Requiring issuers to disclose loan level data on a quarterly basis for any covered bonds issued after 1 January 2013;
- Creating an option for issuers to designate a regulated covered bond programme as backed by a single type of asset;
- Excluding securitisations as eligible assets for regulated covered bond pools;
- Requiring issuers to meet a fixed minimum level of overcollateralization in regulated covered bond programmes;
- And creating a formal role for an ‘asset pool monitor’.
And it’s because of these changes to the UK regime that we have made our market one of the most transparent in the world, providing investors with clarity and confidence.
It is vital that we demonstrate the same endeavour on the international stage.
As the covered bond market grows not just here in the UK, but across the Europe, it is vital that regulation at the international level keeps pace.
Minimum, consistent and non-discriminatory regulatory standards across Europe are critical to underpinning a stable European financial sector.
It’s only by building a covered bond regime based on those principles that we can safeguard a stable and successful covered bond market, capable of underpinning sustainable lending to the real economy.
But even as the European covered bond market continues to expand and becomes increasingly systemic to the European financial sector, there remain practically no minimum regulatory standards in the EU, on transparency and asset quality for covered bonds, on rules on collateralisation and asset encumbrance, or indeed systematic rules on capital requirements.
European regulation needs to provide a framework that reaches the same high standards that we have set in the UK.
Yet already, there are plans underway to allow a covered bond from any Member State to be included in liquidity reporting for any bank in the EU and ultimately in liquidity buffers for any bank in the EU.
A European Covered Bond framework urgently needs a common set of minimum standards to underpin it. The European Commission was due to complete a review in 2010 but this has been postponed; I hope this can now be taken forward as a matter of priority.
Furthermore, under the European capital requirements directive, there remain certain exemptions and opt-outs which should not be continued. This preferential treatment for instruments in particular Member States should be ended, and we should move to a more robust common framework.
The European Central Bank has also expressed its concern about the disparity in transparency standards between covered bonds and securitisations in the Capital Requirements Directive.
In its opinion the legislation provides strong incentives for monetary policy counterparties to package their securitisations into the cover pools of covered bonds, thereby obtaining more favourable treatment, but to the detriment of the Eurosystem’s risk exposure.
As well as robust and consistent treatment under the capital requirements directive, we also need the same in the latest Commission proposal on credit rating agencies.
Under this proposal, agencies will have to give more disclosure about assets in structured products but not covered bonds - there is no logic behind this anomaly. Investors should be able to independently assess risk in both sets of products.
We will continue to argue for strong and proportionate minimum standards on transparency and asset quality when it comes to regulation of the European covered bond market.
I welcome the efforts of the ECBC working group, led by Luca and the Chairman, in defining and establishing the ECBC Label Initiative, which will further the cause of transparency and quality.
In order that the label adds value, it is important that its minimum criteria are robust and that they clearly distinguish between covered bonds of different quality.
This will give the label more credibility and help to ensure that covered bonds that carry the kitemark meet the highest standards for transparency.
It’s only by underpinning global markets with high, non-discriminatory and consistent standards of regulation - ensuring that reform is proportionate and evidenced based, providing the right balance between growth and stability - that we can secure stable financial markets that can support sustainable growth across the economy.
The Covered Bond market is one of those markets, a market that is already well established, and in uncertain times, provides banks with a diverse and resilient source of funding.
It’s a market that is critical to ensuring that banks are able to lend to the real economy, and the UK is committed to supporting its success.
That success has to be sustainable…built on a resilient European Covered Bond market.
It is essential that at the European level we continue to work towards minimum regulatory standards on transparency and asset quality.
To help the covered bond market to continue to play a central role in providing a stable source of funding to all banks.
And I look forward to working with you all in that ambition in the months and years to come.