Covered Bonds covering grounds in Asia, growing globally
Covered bonds, the financial instruments has had its roots deep into the European countries for centuries, are now slowly deepening its roots into the Asian economies as well. The launch of a covered bond program by a major Singaporean bank (United Overseas Bank)[1] is the sign of how these traditional European products are gaining traction in the Asian markets. DBS bank had announced Singapore’s first covered program in the summer of 2015, which was followed by the aforesaid recent program launched in the country to diversify the way the banks fund the loans they make.
Covered bonds are seen as ultra-safe investments as they give dual recourse to the investors on both the issuer and the assets in case of a default, however they have failed to spread their wings in the US economy since securitisation, which allows banks to transfer complete risks away from their balance sheets and efficiently manage their capital requirements, is still a dominant mode of funding in the country
However, the scenario is quite the contrary in other economies. In case of Asian countries, Kookmin a South Korean bank issued the country’s first and Asia’s 3rd covered bond program in October, 2015[2]. Also in India[3] the National Housing Bank , country’s apex institution in the for housing finances of the country and also a subsidiary of the country’s central bank, is looking forward to issue of covered bonds to promote other capital market solutions for the mortgage lending business in India.
Further, the Australian government had announced a reform package, post the economic crisis in 2008, which was mainly for the purpose of implementing Australian banking sector’s competitiveness and searching for funding sources for mortgage market. The package consisted of two components: Issuance of covered bond and Mortgage-backed securities structure improvement.[4]
Also the Bank of New Zealand issued Covered Bonds in Asia Pacific region in June, 2010 for the first time with an issue size of NZ$425million[5].The covered bonds were issued with the purpose of solving two main problems for the banking sector first being over-reliance in short-term deposits and second being securitization.
In most of the Asian countries banks are more reliant on retails deposits than wholesale markets for funding their loans. A developed infrastructure for covered bonds in the Asian economies could be seen as an evolutionary product, which would allow them to fund themselves in times of economic slowdowns. The Asian institutions have lived through very rough and volatile market conditions and know the fact that deposits can dry up, so they are adapting new funding options from their European counterparts.
Reported by: Ameet Roy
Date: 16/12/2015