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Bank capital and covered bonds

12 June 2015
Richard Kemmish

“What do they know of England who only England know?” – Kipling

We covered bond people used to be very insular. Our only annual outing was to the September covered bond conference where we would meet fellow covered bond people and talk about, well, covered bonds. At investment bank morning meetings the covered bond discussion was usually first because we tended to leave when the conversation turned to bank capital (the first use of the phrase ‘point of non viability’ was usually my trigger to go).
Can’t afford that luxury any more. I’ve even found myself expressing opinions on bank capital recently. Which is why I’m going to be moderating a panel on exactly that topic at the Global Borrowers conference in a couple of weeks.

With my obvious bias I’m going to be bringing up bank capital questions that I think are relevant to the covered bond market. For example:

Where is that point of non-viability? And who decides? And what happens next?

As far as I can tell only the third of these seems to have any certainty: bad things happen next. There is a very significant risk – from our parochial perspective – that a PONV being called could cause us to test the transfer of assets in a cover pool to a third party, something that has happened very, very rarely in the past. It is of course possible that this wont happen because of an ordely resolution according to the single resolution mechanism. So it’s a choice of two untested routes, either of which could cause very real problems for our covered bonds.

What about the other two questions? The glib answer is that PONV is a core tier 1 ratio of less than 5.125% and the regulator decides. As I love to point out to capital people, SNS had a core tier 1 ratio of 8.8% when the government decided it was no longer viable.  Lehman was at 10.7% when the market decided the same.  And it this a regulator or a politician’s decision? And if the regulator, for systemic banks, which regulator? the ECB or the national one? 

I’m also hoping to ask the panel about TLAC. Does it mean that systemically important banks (the only ones who have to meet the new rules) are now safer than their smaller competitors? Or that those under a HoldCo are safer than those with just an operating level entity? Hardly a level playing field.

What form will TLAC take? If different from ‘senior’ debt, doesn’t that imply that senior debt / covered bond spreads should converge? But in Germany this seemingly shouldn’t be the case according to the latest draft law.

From a covered bond perspective, how much has to be issued, by when, and what is the impact going to be on the supply of other forms of funding?  As if the supply/demand imbalance wasn’t bad enough.

Please do come along, despite it being about bank capital its relevant to us too.

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