Using Supra-Covered Bonds to Enhance Liquidity in the Euro Area Assessment of Advantages for the Banking Sector

摘要

The discussion on the necessity of a larger volume of very highly quality liquid assets(VHQLA) in the euro area has been very extensive. The debate on expanding the pool of comparableeuro area assets focuses on “safe assets”, often on various combinations of government bonds, most ofwhich would not entail a strong increase in euro VHQLA. This paper explores a different option,complementary to the existing ones, based on the creation of a safe European asset backed by fullyprivate assets. The paper proposes the issuance of supra-covered bonds by a central Europeaninstitution. Thelatterarebondsissuedbythecentralissuerandbackedbycoveredbonds,whichbankswould have created using their mortgages as their cover pool. The aim is to increase substantiallythe outstanding amount of euro VHQLA. Such an asset would also be very beneficial during crisisperiods, such as the current COVID19 crisis, by allowing banks to transform mortgages into very highquality liquid assets that can be used for funding and as a collateral in operations with the Eurosystem,thus enhancing the possible credit to sustain small and medium-sized enterprises (SMEs). This paperassesses the main effects of such a proposal on banks under different possible scenarios.