The European Central Bank, the biggest investor of covered bonds, has thrown its support behind European Commission’s plans to standardize the market.
“Harmonization of the covered bond market in the EU is warranted,” according to the ECB’s response on Friday to the commission’s consultation. The EC is considering whether to enforce a single rule book for covered notes.
The European market for covered bonds, which are a key source of financing for private housing, is fragmented along national lines, with underwriting and disclosure practices varying from country to county. Potential changes to the legal framework for the notes are part of efforts to foster a capital markets union to diversify financing options in Europe, which relies mostly on bank lending.
The securities, which are guaranteed by the issuer and backed by a pool of assets, such as mortgages and public-sector loans, were pioneered in Prussia in 1769 when King Frederick the Great let aristocrats, churches and monasteries raise money by pledging their estates as collateral.
National markets have evolved at different speeds. France’s legal framework for the bonds was introduced in 1852, while U.K. banks first sold them in 2003. Laws differ on matters such as the composition of asset pools and limits on the loan-to-value ratios.
The ECB has bought 149 billion euros ($163 billion) of covered bonds since October 2014 as part of its stimulus measures.