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Opinion

In and out of the money in covered bonds

Too many banks are chasing too few fees.

The covered bond business is not the most exciting in the capital markets but virtually every investment bank is currently striving to enter or re-enter it. Why?

It is not as if good money can be made trading. The only reason why issuers pay fees is because of onerous market-making commitments. A covered bond trading desk that even manages to break even is a good one. Making profits of €1 million to €2 million is the best the leading banks can hope for.

Investment banks need to think politically about how to share costs and profits because the covered bond is something of a cuckoo in a blackbird’s nest. FIG bankers originate the deals and yet the securities are traded and distributed off agency desks.

What will be the shape of the covered bond market in five years? Only the brave would bet against consolidation. This is one of the few sectors where the bulge-bracket firms do not dominate. The question is for how long that will continue to be the case. The internationalization of the product away from the German home offers a serious threat as well as opportunities for market participants.

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