Global Rates Comment: From Retained to Public Funding: ECB Reforms Could Reshape Covered Bond Supply

Research evidence excerpt

Global Rates Comment: From Retained to Public Funding: ECB Reforms Could Reshape Covered Bond Supply

Global Research

22 July 2026ab

Global Rates Comment Interest Rates

GlobalFrom Retained to Public Funding: ECB Reforms

Could Reshape Covered Bond Supply Annalaura Capuano

Strategist

annalaura.capuano@ubs.com

+44-20-7567 1879

ECB policy normalisation could challenge the use of retained covereds as

indirect source of funding. The ECB is reportedly considering raising minimum

reserve requirements to 2% while also introducing higher haircuts on own-use

covered bonds, two measures that would reduce excess liquidity and limit banks'

ability to generate ECB funding using retained collateral.

Retained covered bond issuance remains exceptionally high. Banks have

issued c.EUR129bn equivalent of retained covered bonds in 2026 YTD, versus

c.EUR172bn in FY2025, while outstanding retained covereds have grown to

c.EUR765bn as banks increasingly use them to maintain access to central bank

liquidity.

If retained covered bonds become a less efficient liquidity tool, banks may need to

increase reliance on market funding, potentially leading to higher public

covered bond issuance from 2027 onwards.

ECB Policy Normalisation: Implications for Retained Covered Bonds

As highlighted in our note, the ECB is reportedly considering increasing banks'

minimum reserve requirement (MRR) from 1% to 2% to “lessen Eurosystem losses”

and “mop up some excess liquidity.” Such a move would directly reduce the amount

of excess liquidity in the banking system, with estimates suggesting a reduction of

around EUR170bn, while lowering annual interest payments from the Eurosystem to

banks by roughly EUR4bn. A decision could potentially be taken in autumn 2026.