Covered Bond Eligible Assets
Richard Kemmish
30 years: Capital markets & covered bonds
In this video, Richard Kemmish looks at eligible assets and analyses their effect on collateral covered bond agreements.
In this video, Richard Kemmish looks at eligible assets and analyses their effect on collateral covered bond agreements.
Covered Bond Eligible Assets
6 mins 35 secs
Assets must go under intense processes such as Capital Requirements Regulations, article 129 before being labelled eligible as collateral for covered bonds. However, the definition varies globally due to different laws.
Key learning objectives:
Identify the rules outlined in Capital Requirements Regulations, article 129
Explain how rules differ nationally and why the definition is so narrow
Define ESNs, and describe the determinants
What is the EU’s official list of eligible assets?
Capital Requirements Regulations, article 129:
- Paragraph A & B - Public-Sector Assets
These are any public sector receivables in the EU, any outside the union rated Double A minus or above, and any outside the union, rated Single A subject to a cap of 20% of the total pool.
- Paragraph C – Swaps and Substitute Assets
It says that for an amount of up to 15% of the covered bonds outstanding, other receivables rated Double A minus or above are eligible.
- Paragraph D & E – Residential Mortgages
The loan-to-value ratio limit is up to 80% of the value of the property backing the loan. Additional details include: certain qualifying securitisations backed by residential mortgages and guaranteed home loans are allowed under certain strict limits.
- Paragraph F – Commercial Mortgages – the loan-to-value ratio limit is 60%
- Paragraph G – Ship Mortgages – allows mortgages on ships to be eligible as collateral
How do definitions differ nationally?
Most countries use either this definition in their law or a subset of it. For example, some countries only allow residential mortgages, most countries disallow mortgages secured on ships.
In Germany, covered bonds can be backed by mortgages on aircraft. Also, under Turkish law, loans to small and medium-sized companies are eligible.
Why is the eligible asset definition so narrow?
- They are simply very high credit quality assets
- These assets were chosen because they are very important
- Mortgages are secured on real assets
- Underlying assets have a known value for a long time period
What are ESNs, and what needs to be considered prior to its launch?
European Secured Notes are securities backed by loans to small and medium-sized enterprises. Over 3 trillion euros of loans to SMEs on the books of European banks suggests it has clear potential to become a new significant asset class.
Determinants:
- How to define SMEs
- How to put in place sufficient credit safeguards
- What sort of investor treatment would be justified for the asset class
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