Frequently asked questions on covered bond purchase programmes

Updated on 8 January 2025

The Eurosystem no longer conducts purchases of covered bonds under the asset purchase programme (APP) or the pandemic emergency purchase programme (PEPP). This follows the Governing Council’s decision on 15 June 2023 to discontinue reinvestments under the APP from July 2023 and the Governing Council’s decision on 12 December 2024 to discontinue fully reinvestments under the PEPP at the end of 2024.

Eligibility criteria

Q1.1 What were the minimum and maximum maturities of covered bonds eligible for purchase?

No minimum or maximum maturities were defined.

Q1.2 What was the minimum issuance volume of covered bonds eligible for purchase?

No minimum issuance volume was defined.

Q1.3 How is a covered bond treated if it has two or more ratings? Which rating do you use to determine eligibility?

If there are multiple, and possibly conflicting, credit rating assessments from the accepted external credit assessment institutions, the first-best rule is applied.

Q1.4 Did 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 under the CBPP3, which were monetary policy operations and constituted supply of reserves, made 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.

Q1.5 Did the issue share limit of 70% apply only to CBBP3 holdings?

No. The 70% limit applied to the combined covered bond holdings of the Eurosystem’s monetary policy purchase programmes and the Eurosystem’s investment portfolios.

Q1.6 Why were conditional pass-through covered bonds made ineligible for purchase in 2019?

The Governing Council decided to exclude conditional pass-through covered bonds from purchases under the CBPP3 as of 1 January 2019. The decision reflected the somewhat more complex structure of these bonds, whereby some predefined events may have led to the 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 had no consequences for the eligibility of conditional pass-through covered bonds in the Eurosystem collateral framework.

Retained bonds

Q2.1 Does the issue share limit of 70% per international securities identification number (ISIN) also apply to “fully retained” issues?

Yes.

Procedures

Q3.1 Does the Eurosystem share income and losses generated by covered bond purchases under the CBPP3?

Yes.

Q3.2 Did 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 took due account of their specific competencies.

Q3.3 Could asset managers and non-bank financial institutions offer eligible securities for purchase under the APP and PEPP?

Asset managers and non-bank financial institutions were not eligible counterparties and therefore could not directly sell securities to the Eurosystem under the APP and PEPP. However, under the APP and PEPP, the Eurosystem offered 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. Although final responsibility for the offered assets remained entirely with the eligible counterparties, they could include them in the daily inventories of assets they shared with the Eurosystem, either by explicitly reporting which assets were offered on behalf of non-eligible counterparties or by aggregating them with their inventories. In periods of heightened investor uncertainty, such as during the COVID-19 pandemic, this option contributed to alleviating market tensions and supporting proper market functioning.

Collateral eligibility

Q4.1 Under the CBPP3, the Eurosystem was able to buy up to 70% of a covered bond issue per ISIN. In the case of the remaining 30%, are these eligible for Eurosystem repo purposes, assuming they meet the covered bond requirement criteria?

Provided all eligibility criteria are fulfilled, the remaining outstanding amount of the covered bonds can be used as collateral in Eurosystem credit operations.

Other questions

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 Did the Eurosystem act as a “regular” investor when conducting covered bond purchases under the monetary policy purchase programmes?

The Eurosystem purchased covered bonds at prevailing market prices.

Q5.3 Did covered bond purchases crowd out the covered bond market? Why did the Eurosystem decide to buy covered bonds given the structural features of the assets class?

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 and the loans that back the covered bond is reasonably tight. As the prices for covered bonds increased, we expected banks to respond by originating more covered bonds and thus more loans to collateralise them. Second, outright interventions in this market complemented other purchases by reinforcing the portfolio rebalancing channels of monetary policy transmission and generating positive spillovers into other markets and securities. This further eased funding and credit conditions. Third, taken together, the Eurosystem’s non-conventional measures should have been seen as complementing one another, strengthening the combined impact on liquidity and the economy. Finally, purchases took due account of market functioning. In any case any potential crowding out was temporary as the covered bond market experienced very strong issuance following the end of APP reinvestments and the repayments of targeted long-term refinancing operations.

Q5.4 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 44(2)(b) of the Bank Recovery and Resolution Directive is explicitly exempt from any bail-in measure in the event of bank resolution.

Q5.5 Given that the Eurosystem had a large presence in the covered bond market, did it adopt any general stance towards consent solicitations?

The Eurosystem examines the merits of each individual case and aims for 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.