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Asian covered bonds at a cross roads

09 February 2016
Richard Kemmish

I like a tired cliché as much as the next man, but I always think that the phrase “at a crossroads” should usually be “at a fork in the road”. The difference being the number of options ahead of you, usually there are only two. But the future of Asian covered bonds really is a crossroads, with three distinct alternatives to choose between.

The default assumption so far has been that Asian countries will start to copy the European model of covered bonds, certainly that was the route that the Singaporeans adopted. It makes perfect sense if the objective is to attract foreign investment from Europe – emulate the product that the investors are used to. It makes some sense if the intention is to attract foreign investors from America – similar, but without the structural incentives to invest that reinforce the choice of model – or if the plan is to develop domestic capital markets, for example by increasing the stock of private sector high quality liquidity assets – if there is good technology, use it.

Looking forward the ‘copy Europe’ model might start to make more sense if the European Commission moves forward on ‘mutual recognition’ of covered bond regimes or if the concept of covered bonds gains traction in the Basle rules.

But there are also arguments for reinventing the European model for local specificities. In particular, many Asian countries don’t have Singapore’s advantages such as a stable domestic capital market, a very high national credit rating or well developed and understood underlying mortgage assets.

A straight copy of a European covered bond law makes less sense if you are looking to attract non-covered bond investors (either emerging markets investors or generalist fixed income funds), if your most urgent funding need is infrastructure or SMEs rather than the more traditional residential mortgages, if you are issuing from a lower rated country or even if you have no liquid market for foreign exchange swaps. 

Which is not to say that most of the European technology should be discarded, just applied in a more thoughtful way to local needs.  
The third path leads to a more ‘agency’ style approach to the market. Many countries in the region have such agencies but with large variations in their current size and the extent to which they are fit for purpose.

Some of these agencies are agents for change and are exploring how they may use covered bond technology. Those European agencies – and in some cases private sector companies - that combine mortgages from more than one issuer in a single bond may appear to be either a niche product or an historic accident in Europe but could provide a useful precedent in Asia. 

Best of all though, unlike at a cross roads, you do not need to make only one choice, the covered bond alternatives could be investigated in tandem.

I’m looking forward to discussing these choices is at the Euromoney Asian Covered bond forum in Singapore.

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