30 years: Capital markets & covered bonds
The new EU Covered Bond Directive has standardised the definition and minimum standards for covered bonds. In this video of the series, Richard discusses the most important of those investor rules for a bank investor, insurance investor and mutual fund investor.
The new EU Covered Bond Directive has standardised the definition and minimum standards for covered bonds. In this video of the series, Richard discusses the most important of those investor rules for a bank investor, insurance investor and mutual fund investor.
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10 mins 29 secs
There are numerous rules and regulations set out by the EU Covered Bond Directive such as minimal capital requirements – each of these have a specific impact upon banking, insurance and mutual fund investors.
Key learning objectives:
Define LCR and identify the sub-category of assets
Define Covered Bond
Outline the different rules/regulation for banking, insurance and mutual fund investors
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Covered bonds are bonds issued by a credit institution in a member state, subject by law to special public supervision designed to protect bondholders. Sums from the issue of those bonds shall be invested in accordance with the law in assets, which in the vent of failure of the issuer, would be used to pay the principle and accrued interest.
Banks have to hold a pool of very liquid, high quality assets to cover their cash outflows over the next 30 days. According to the EBA, this typically is 10% or more of the bank’s entire balance sheet.
Insurance companies are subject to regulation under the Solvency 2 rules. It looks at the risks concerning credit risk. They look at how much an insurer might lose because of movements in credit spreads in the assets they hold. Covered bonds are also relevant to rules limiting concentration risks in an insurer’s portfolio.
For mutual funds (UCITS): for qualifying bonds, funds are exempt from the normal rule limiting them to 5% of their portfolio in the bonds of any one issuer. For covered bonds this can be up to 25%.
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