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 1997 Luxembourg, LdG 2002 Ireland, ACS Spain, CT 2004 Hungary CB (EUR) 2006 Sweden, US CB, Portugal CB, France Structured CB 2008 Danish, new CB Type Italian, OBG Dutch CB 1995 Germany Jumbo Pfandbrief 1999 Spain, CH France, OF 2003 UK, contract CB Austria, FSV 2005 Finnish CB Dutch contract CB 2007 Norwegian CB Canadian CB 2009 Greek CB Swiss CB (EUR) 2010 France, OH Finnish CB New Zealand contract CB 2011 Cyprus CB Australian CB 2012 Belgium
Covered bond: a dual-recourse instrument 4 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 6
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 7
Eligibility Criteria for ECB repo: Applied haircuts Liquidity haircuts for eligible marketable assets (%) Category ICategory 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- 0-10.5 1.0 1.5 6.5 16 1-31.5 2.5 3.0 8.59.0 3-52.53.03.54.05.05.511.011.5 5-73.03.54.55.06.57.512.513.5 7-104.04.55.56.58.59.514.015.5 >22.214.171.1242.011.016.517.022.5 BBB+ to BBB- 0-15.5 6.0 8.0 15.0 Not eligible 1-36.5 10.511.518.019.527.529.5 3-57.58.015.517.025.528.036.539.5 5-78.08.518.020.528.031.538.543.0 7-109.09.519.522.529.033.539.044.5 >1010.513.520.029.029.538.039.546.0 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 9 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? 10 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? 11 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 12 Source: ECBC Fact Book