The ECB applies different valuation haircuts for covered bonds and senior unsecured debt as shown in the
figure above. While covered bonds belong to liquidity categories II and III, unsecured bank bonds are in liquidity category IV with substantially higher haircuts. Moreover, covered bonds have been exempt from the
ECB’s close-link prohibition under which a bank cannot submit its own senior unsecured bonds as collateral.
Own-name covered bonds are accepted, subject to additional haircuts.
When comparing covered bonds vs. sovereign debt on the other hand one can see that sovereign debt still
gets the most favourable treatment by the Eurosystem. Covered bonds are not far behind though. For a 5 ิY
AAA jumbo covered bond in category 2, the haircut differential is a mere 2% while for a covered bond from
category 3 the difference is 2.5%.
For repo purposes we thus still have the old traditional ranking between asset classes. Sovereign debt is treated
best, covered bonds follow closely behind and senior unsecured exposure has the highest haircuts and the
most limitations (close link rule).