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]


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Reported by: Shambo Dey