What Should Asian Covered Bonds Look Like?
07 Feb 2017
...European covered bonds? The approach taken by Asian covered
bond issuers to date, most obviously in Singapore, has been to
make Asian covered bonds look as much as possible like European
covered bonds. It is obvious enough why. If you make the
covered bonds similar to the existing product you make it easy
for the existing investor to buy it. Yes, you still need to get
sign off for a new country with all of the due diligence that
implies, no, you dont get a preferential risk weighting
but at least the structure is familiar. Thats one less
thing to worry about in the credit memo.
This approach makes perfect sense particularly in the current
environment a dearth of traditional bonds from
traditional countries and a negative yield on most of the ones
that are out there.
It also makes perfect sense given the regulatory trends. There
are two aspects to this. Whatever the outcome of the current
process we know that the direction of travel preferred by the
EBA and the European Commission is towards a greater degree of
standardisation (harmonisation, call it what you will) within
the European regulated covered bond market. The possibility of
new asset classes is perhaps at odds with this but any new
asset class is primarily judged against the extent that it
looks like the existing asset classes and can be forced into
Then there is the possibility (probability?) of Basle
recognising the asset class on a global basis for the first
time. Is European harmonisation going to make that more likely?
Quite possibly. It will also most likely form the template for
the idea of covered bonds in the Basle framework. The benefits
that accrue from Basle recognition of the asset class are only
likely to come to those that conform to this model.
But there are two challenges to this orthodoxy: cant and
In Singapore this doesnt apply but in many Asian
jurisdictions you just cant replicate the European model.
Singapore has a strong credit rating, a prudent supervisory
framework, clarity of legal process and lots of home loans.
Drop any one of those four conditions and it suddenly becomes
impossible to make something that looks like a pfandbrief. Drop
the conditions too much and it becomes impossible to meet even
the harmonised minimums that are the European covered bond
Take Turkey for example, there arent enough traditional
assets and the sovereign rating is not so strong. By necessity,
the authorities there designed something that does not meet the
And the example of Turkey leads to the shouldnt try
to replicate the European model. The fact that the
covered bonds there are often backed by loans to SMEs and have
different structural features has in no way held back investor
appetite for the product. On the contrary.
But what about the details? The structural features that must
change to make Asian covered bonds work? Lets discuss
that in the next post.
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