30 years: Capital markets & covered bonds
To provide the level of protection for covered bonds demanded by investors, supervisors and rating agencies, you need more assets backing the bonds than there are bonds outstanding. In this video of the series, Richard discusses over-collateralisation: how to calculate it and how it is regulated.
To provide the level of protection for covered bonds demanded by investors, supervisors and rating agencies, you need more assets backing the bonds than there are bonds outstanding. In this video of the series, Richard discusses over-collateralisation: how to calculate it and how it is regulated.
7 mins 15 secs
Over-collateralisation is the most important piece of protection in covered bonds demanded by investors, supervisors and rating agencies. It essentially provides an extra safety margin in case of disruptions.
Key learning objectives:
Understand when OC is used and the different ways to calculate it
Describe the general requirements and, if inadequate, identify what extra OC can be used
Identify if covered bonds from some countries are safer than others
EU Covered Bond Directive – recently passed into law states there is a minimum level of over-collateralisation that the covered bond issuer must maintain at all times. In most countries this is 5%, but there are plenty of exceptions to that rule with over-collateralisation by law ranging from 2-25%.
The Directive only requires that the nominal value of assets is at least the nominal value of liabilities.
This is more complex because:
Two methods:
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