the covered bond market october 2012. covered bond legislation in europe 2
TRANSCRIPT
THE COVERED BOND MARKET October 2012
Covered bond legislation in Europe
2
In 2010: 22 new issuers and a total of 300 issuers in Europe
There are active covered bond markets in over 25 different European jurisdictions
Forthcoming legislation: Mexico, Morocco, Canada, New Zealand, Japan, Singapore South
Korea and U.S.
Covered bond legislation in Europe
3
1997Luxembourg,
LdG
2002Ireland, ACS
Spain, CT
2004Hungary CB
(EUR)
2006Sweden, US CB,
Portugal CB, France Structured CB
2008Danish, new CB Type
Italian, OBGDutch CB
1995Germany
Jumbo Pfandbrief
1999Spain, CHFrance, OF
2003UK, contract CB
Austria, FSV
2005Finnish CB
Dutch contract CB
2007Norwegian CBCanadian CB
2009Greek CB
Swiss CB (EUR)
2010France, OHFinnish CB
New Zealand contract CB
2011Cyprus CB
Australian CB
2012Belgium
Covered bond: a dual-recourse instrument
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Credit institution
Pool of collateral
Senior unsecured
debt
ABS (Asset-Backed
Securities
COVERED BONDS
Essential features of covered bonds
5
Covered Bonds
Credit Institution
Dual Recourse
Quality of Assets
Public Supervision/ Dedicated Legal
Framework
Dynamic pool/OC
The ECBC Covered Bond Label responds to a market-wide request for improved standards and increased transparency in the European covered bond market. The Label: establishes a clear perimeter for the asset class; highlights to investors the core standards and quality of covered bonds; provides improved transparency and access to information at cover pool
and issuance levels; and has the objective of improving liquidity in covered bonds. The ECBC Covered Bond Label has been developed by the European issuer community, working in close cooperation with investors and regulators, and in consultation with all major stakeholders.
Covered bond Label Initiative
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Art 52 (4) UCITS:
CB must be issued by an EU credit institution The credit institution must be subject to special public supervision by
virtue of legal provisions protecting bondholders Bondholders’ claims on the issuer must be fully secured by eligible
asset until maturity Bondholders must have a preferential claim on the cover assets in
case of the issuer’s default
CRD:
Compliance with the Art 52(4) UCITS The cover assets must be constituted only of assets of specially-
defined types and credit quality New quantitative restrictions on cover assets (e.g. 15% exp on credit
institutions) The issuers of CB backed by must meet certain minimum
requirements regarding mortgage property valuation and monitoring
Covered bond, legislative cornerstones in EU
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Eligibility Criteria for ECB repo: Applied haircuts
Liquidity haircuts for eligible marketable
assets (%)
Category I Category II* Category III* Category IV* Category V*
Central government and central banks debt instruments
Local and regional government debt
instruments
Jumbo covered bonds
Agency and supranational debt
instruments
Traditional covered bank bonds
Debt instruments issued by non-
financial corporations and other issuers
Non-UCITS compliant covered bonds, including both
structured and multi-seller covered bonds
Credit institution debt instruments
(unsecured)
Debt instruments issued by financial corporations other
than credit institutions (unsecured)
Asset-backed securities
Credit Quality
Residual maturity (years)
Fixed coupon
Zero Coupon
Fixed coupon
Zero Coupon
Fixed coupon
Zero Coupon
Fixed coupon
Zero Coupon
Fixed or zero coupon
AAA
to
A-
0-1 0.5 0.5 1.0 1.0 1.5 1.5 6.5 6.5
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1-3 1.5 1.5 2.5 2.5 3.0 3.0 8.5 9.0
3-5 2.5 3.0 3.5 4.0 5.0 5.5 11.0 11.5
5-7 3.0 3.5 4.5 5.0 6.5 7.5 12.5 13.5
7-10 4.0 4.5 5.5 6.5 8.5 9.5 14.0 15.5
>10 5.5 8.5 7.5 12.0 11.0 16.5 17.0 22.5
BBB+
to
BBB-
0-1 5.5 5.5 6.0 6.0 8.0 8.0 15.0 15.0
Not eligible
1-3 6.5 6.5 10.5 11.5 18.0 19.5 27.5 29.5
3-5 7.5 8.0 15.5 17.0 25.5 28.0 36.5 39.5
5-7 8.0 8.5 18.0 20.5 28.0 31.5 38.5 43.0
7-10 9.0 9.5 19.5 22.5 29.0 33.5 39.0 44.5
>10 10.5 13.5 20.0 29.0 29.5 38.0 39.5 46.0
Source: ECB * On top of those haircuts there is a 5% valuation haircut which is applied to the ECB’s valuation of the assets, in the absence of a market, the theoretical value of the asset less an additional percentage (haircut)
Covered bonds from a macroeconomic perspective
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Covered bonds’ role and importance in funding strategies;
Covered bonds’ contribution to financial stability;
Macro-prudential features => reduction of systemic risk;
Housing finance from private sector.
“Given that the financial crisis clearly exposed the dire consequences of the imprudent evaluation of credit risk, the usefulness of more conservative asset classes such as covered bonds, which have proved to be safe assets over a long time, is obvious.”
Jean-Claude Trichet, European Central Bank President, July 2009.
Issuers’ perspective: why CBs?
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Adding duration to liabilities, allowing banks to properly match their long-term asset portfolios;
Providing stability to the funding mix, allowing ALM teams to increase predictability in their maturity profiles;
Enabling issuers to increase diversification in the investor base, both in terms of geography and investor type; and
Serving the industry as one of the most reliable funding tools, even in times of turmoil.
Investors’ perspective : why CBs?
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Double recourse to issuer and cover pool;
Higher rating than unsecured debt;
Lower risk weighting for EAA CB bought by EAA banks;
Favourable treatment under Solvency II;
Generally better level of liquidity through larger issue size;
Favourable REPO treatment at ECB and other Central Banks;
Basel III eligible as liquid asset as Level II 40% cap & 15% hc
No risk of bailing in.
Development of covered bonds by underlying collateral
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Source: ECBC Fact Book
Mortgage covered bonds outstanding 2011
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Source: ECBC
Poland
Slovakia
Hungary
Cyprus
Czech Republic
Austria
Finland
Greece
Ireland
Portugal
Italy
Netherlands
United Kingdom
France
Sweden
Germany
Denmark
Spain
0 100,000 200,000 300,000 400,000
Mortgage covered bonds as % of residential loans outstanding in 2011
14
Source: ECBC / EMF
LatviaPoland
NetherlandsUK
ItalyAustria
GermanyHungaryFinlandIrelandFranceGreece
Weighted AveragePortugalSlovakia
CyprusCzech Republic
SpainSweden
Denmark
0.00% 20.00% 40.00% 60.00% 80.00% 100.00%
Contact details
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European Covered Bond Council (ECBC)
Avenue de Cortenbergh, 71B-1000 Brussels
Belgium
[email protected]+32 2 285 40 49
http://ecbc.hypo.org - www.ecbc.eu
European Covered Bond Council (ECBC)
Avenue de Cortenbergh, 71B-1000 Brussels
Belgium
[email protected]+32 2 285 40 49
http://ecbc.hypo.org - www.ecbc.eu