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ECB’s new LTRO threatens the covered bond market

Banks may opt for cheaper long-term LTRO funding rather than secured issuance next year

The covered bond market has been a vital source of funding for banks in 2011 and participants are probably looking forward to another busy year for the primary market in 2012. Issuance for the first three quarters of 2011 was €262.6 billion with many banks turning to secured funding to address their problems in the senior unsecured market.

However, the covered bond markets’ cheerleaders might not be factoring in the impact of the ECB’s decision on December 8 to extend its long-term refinancing operations to 36 months and to expand eligible collateral to include ABS backed by mortgages or SME loans with a rating as low as single-A. Mario Draghi announced the changes to the bank’s non–standard measures in a speech designed to reassure the market of the ECB’s commitment to support the Eurozone’s banks. “The lengthening of the term funding should give confidence and should give certainty to the funding profiles of the banks,” he said.

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