News on Covered Bonds: European Bank Association’s Stamp of Approval for Covered Bonds
European Bank Association’s Stamp of Approval for Covered Bonds
October 30, 2013
Data presented at the European Banking Authority's public hearing this week has boosted the outlook for covered bonds in the continent. The regulator released its findings at a public hearing on liquidity in London, where it also summarised responses to a discussion pap er on defining liquid assets released in February and its views on the feedback. The EBA is charged with advising the European Commission, by 31 December 2013, on the determination of “extremely high” and “high” quality liquid assets (HQLA) for LCRs under the Capital Requirements Regulation (CRR), corresponding to Level 1 and Level 2 assets under Basel III, respectively. [ 1]
The EBA's findings may pave the way for covered bonds to be counted among the highest rank of assets – Level 1 – in a bank's liquidity coverage ratio, meaning they do not face haircut in the calculation of a bank's LCR. [ 2] EBA’s data is gathered from 9 million trades, 13,000 bonds, 1 million observations and 844 distinct equities. The EBA rated government bonds, covered bonds, non -financial corporate bonds, ABS (including RMBS) and equities on 8 distinct criteria, including pricing impact, trading volume, turnover ratio, and 30 -day price. The scale was from 1 to 5 , with 1 being the highest score and 5 the lowest. Both covered bonds and government bonds scored an average of two, whereas ABS finished in fifth place with 4.38. [ 3]
The EBA held that the results were preliminary and subject to change before it publishes a report on liquidity ratios and HQLAs at the end of the year.
However in the US, the Fed has opposite views. According to the Fed, covered bonds do not deserve a place within Level 1 assets. It published a paper on the implementation of LCR requirements. It will keep covered bonds at a ranking below sovereign paper,
holding the view that they are insufficiently liquid and hence not marketable. [ 4]
Notes:
- 1.http://www.coveredbondnews.com/Article/3272130/Statistics -say-what- youwant.html
- 2.http://www.ifre.com/eba-boosts-covered-bond-hopes/21115692.article
- 3.http://nordic-fi.com/early-eba-liquidity-ranking-boosts-covered-bonds-lcr -case/
- 4.http://www.federalreserve.gov/FR_notice_lcr_20131024.pdf
Reported by: Shambo Dey