Reasons to be Cheerful
20 Feb 2017
Two of the most reliable facts in the covered bond market are
that new jurisdictions always take longer than you think to
come online and that I am always an optimist. The latter is the
stronger of these two forces so Ill suggest that the rate
of development of new jurisdictions should start to accelerate
over the next few years. There are several factors underpinning
Firstly, a lot of banks, particularly those who went into new
countries, particularly when those new countries used to be
much worse rated than their own, are now having second
thoughts. As a result of both bank regulation (scarce capital,
resolution planning) and poorer credit in the parents
home market, the regulators in the daughter markets are
increasingly demanding that their banks look after their own
capital and funding. Whether this means that the parent bank
exits the market or just leaves the local treasury to do their
own thing, either way it means greater pressure for local
Secondly, the EBA. For personal reasons I cant comment on
whether their December recommendations are going to make it
into EU law or not, but I can say that they have published the
closest the market has to the definitive guide: How to
structure your covered bond market. I can personally
vouch for how useful their 2014 publication was when helping
countries put in place a new covered bond law; this is better.
Then there is the improvement in the cost effectiveness of the
covered bond product thanks to the EUs latest proposals
on the Nest Stable Funding Ratio. Its a topic that
warrants an entire column to itself (I promise), for now
suffice to say that the possibility of interdependence rules
for covered bonds in this ratio takes away one of the few
remaining reasons not to prefer covered bonds over senior
unsecured funding. Yes, this is just in the European Union. But
where the EU leads in covered bond regulation, other regulators
On which topic, Basle. Non-EU covered bonds so far have been
almost entirely about non Europeans structuring bonds for
European consumption despite the EU prudential treatment being
for EEA only covered bonds. Shove the words
covered bonds into the BIS rule book and not only
do you open up non-EU investor markets for the product, you
also increase the probability of a level playing field for
non-EU bonds in the oldest and largest market.
Every article I read about the future of Fannie and Freddie in
the US makes me think that the worlds largest housing
market needs the worlds best housing finance tool.
Finally, most depressingly for us Europeans, the risk/return
profile in the existing markets keeps deteriorating, making
investing in the new markets increasingly compelling. As one of
my panellists once said at a Euromoney conference, emerging
markets are the countries where at least you get paid for the
sovereign risk that you are taking.
I look forward to discussing this further at the upcoming
Euromoney Asian Covered Bond Forum in Singapore next month.
For more information about the Forum, please visit the event webpage.
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