UPDATE 3-Interbank covered bond trading halted on volatility

(Adds Abbey National bond postponed, byline)

By Natalie Harrison

LONDON, Nov 21 (Reuters) - Renewed credit turmoil and volatility led the European Covered Bond Council (ECBC) on Wednesday to suspend inter-bank market-making in covered bonds until Monday, Nov. 26.

The move is a sign of the stress in the covered bond market, which is dominated by German institutions that have almost a trillion euros of covered bonds outstanding.

Covered bonds -- backed by pools of assets that remain on the borrower's balance sheet -- are usually highly liquid and typically rated triple-A by ratings agencies.

The ECBC's recommendation is aimed at relieving the pressure on market makers who are forced to quote prices at a fixed bid-offer spread that can mean relatively small sales of paper by end investors ricochet around the market, depressing prices sharply.

"In light of the current market situation and in order to avoid undue over-acceleration in the widening of spreads, the 8-to-8 Market-Makers & Issuers Committee recommends that inter-bank market-making be suspended," the ECBC said in a release. Market-maker obligations to investors will remain unaffected.

"It's good for the market," said Christoph Anhamm, head of ABS and covered bond research at ABN AMRO in Frankfurt. "It gives the market time to think."

"Quite a substantial part of the recent spread widening, particularly in the last three to four days, was driven by the mechanics of the inter-dealer market making obligation," he said. "There is even some evidence that those bonds that are of high liquidity have been more heavily penalised than those which are less liquid."

The suspension may run longer than Nov. 26, he said.

"Due to general market conditions and the specific mechanics of the inter-dealer market making it even seems possible that inter-dealer market making will not be resumed this year," Anhamm said.

SECOND MAJOR DISRUPTION

The ECBC set up the 8-to-8 Committee, consisting of the eight largest representatives of issuers and market-making banks, in September. It acts as an ad hoc advisory body to help restore trading stability in times of market disruption.

European credit spreads have widened significantly in the last couple of weeks on growing concerns about bank writedowns on subprime-related exposures.

The market was disrupted in August and September as investors were forced to sell assets that were liquid and tradeable, and as a result, bid-offer spreads were tripled.