THE COVERED BOND MARKET October 2012. Covered bond legislation in Europe 2.

THE COVERED BOND MARKET October 2012

Covered bond legislation in Europe

2

In 2010: 22 new issuers and a total of 300 issuers in Europe

There are active covered bond markets in over 25 different European jurisdictions

Forthcoming legislation: Mexico, Morocco, Canada, New Zealand, Japan, Singapore South

Korea and U.S.

Covered bond legislation in Europe

3

1997Luxembourg,

LdG

2002Ireland, ACS

Spain, CT

2004Hungary CB

(EUR)

2006Sweden, US CB,

Portugal CB, France Structured CB

2008Danish, new CB Type

Italian, OBGDutch CB

1995Germany

Jumbo Pfandbrief

1999Spain, CHFrance, OF

2003UK, contract CB

Austria, FSV

2005Finnish CB

Dutch contract CB

2007Norwegian CBCanadian CB

2009Greek CB

Swiss CB (EUR)

2010France, OHFinnish CB

New Zealand contract CB

2011Cyprus CB

Australian CB

2012Belgium

Covered bond: a dual-recourse instrument

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Credit institution

Pool of collateral

Senior unsecured

debt

ABS (Asset-Backed

Securities

COVERED BONDS

Essential features of covered bonds

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Covered Bonds

Credit Institution

Dual Recourse

Quality of Assets

Public Supervision/ Dedicated Legal

Framework

Dynamic pool/OC

The ECBC Covered Bond Label responds to a market-wide request for improved standards and increased transparency in the European covered bond market.  The Label:   establishes a clear perimeter for the asset class; highlights to investors the core standards and quality of covered bonds; provides improved transparency and access to information at cover pool

and issuance levels; and has the objective of improving liquidity in covered bonds.  The ECBC Covered Bond Label has been developed by the European issuer community, working in close cooperation with investors and regulators, and in consultation with all major stakeholders.

Covered bond Label Initiative

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Art 52 (4) UCITS:

CB must be issued by an EU credit institution The credit institution must be subject to special public supervision by

virtue of legal provisions protecting bondholders Bondholders’ claims on the issuer must be fully secured by eligible

asset until maturity Bondholders must have a preferential claim on the cover assets in

case of the issuer’s default

CRD:

Compliance with the Art 52(4) UCITS The cover assets must be constituted only of assets of specially-

defined types and credit quality New quantitative restrictions on cover assets (e.g. 15% exp on credit

institutions) The issuers of CB backed by must meet certain minimum

requirements regarding mortgage property valuation and monitoring

Covered bond, legislative cornerstones in EU

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Eligibility Criteria for ECB repo: Applied haircuts

Liquidity haircuts for eligible marketable

assets (%)

Category I Category II* Category III* Category IV* Category V*

Central government and central banks debt instruments

Local and regional government debt

instruments

Jumbo covered bonds

Agency and supranational debt

instruments

Traditional covered bank bonds

Debt instruments issued by non-

financial corporations and other issuers

Non-UCITS compliant covered bonds, including both

structured and multi-seller covered bonds

Credit institution debt instruments

(unsecured)

Debt instruments issued by financial corporations other

than credit institutions (unsecured)

Asset-backed securities

Credit Quality

Residual maturity (years)

Fixed coupon

Zero Coupon

Fixed coupon

Zero Coupon

Fixed coupon

Zero Coupon

Fixed coupon

Zero Coupon

Fixed or zero coupon

AAA

to

A-

0-1 0.5 0.5 1.0 1.0 1.5 1.5 6.5 6.5

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1-3 1.5 1.5 2.5 2.5 3.0 3.0 8.5 9.0

3-5 2.5 3.0 3.5 4.0 5.0 5.5 11.0 11.5

5-7 3.0 3.5 4.5 5.0 6.5 7.5 12.5 13.5

7-10 4.0 4.5 5.5 6.5 8.5 9.5 14.0 15.5

>10 5.5 8.5 7.5 12.0 11.0 16.5 17.0 22.5

BBB+

to

BBB-

0-1 5.5 5.5 6.0 6.0 8.0 8.0 15.0 15.0

Not eligible

1-3 6.5 6.5 10.5 11.5 18.0 19.5 27.5 29.5

3-5 7.5 8.0 15.5 17.0 25.5 28.0 36.5 39.5

5-7 8.0 8.5 18.0 20.5 28.0 31.5 38.5 43.0

7-10 9.0 9.5 19.5 22.5 29.0 33.5 39.0 44.5

>10 10.5 13.5 20.0 29.0 29.5 38.0 39.5 46.0

Source: ECB * On top of those haircuts there is a 5% valuation haircut which is applied to the ECB’s valuation of the assets, in the absence of a market, the theoretical value of the asset less an additional percentage (haircut)

Covered bonds from a macroeconomic perspective

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Covered bonds’ role and importance in funding strategies;

Covered bonds’ contribution to financial stability;

Macro-prudential features => reduction of systemic risk;

Housing finance from private sector.

“Given that the financial crisis clearly exposed the dire consequences of the imprudent evaluation of credit risk, the usefulness of more conservative asset classes such as covered bonds, which have proved to be safe assets over a long time, is obvious.”

Jean-Claude Trichet, European Central Bank President, July 2009.

Issuers’ perspective: why CBs?

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Adding duration to liabilities, allowing banks to properly match their long-term asset portfolios;

Providing stability to the funding mix, allowing ALM teams to increase predictability in their maturity profiles;

Enabling issuers to increase diversification in the investor base, both in terms of geography and investor type; and

Serving the industry as one of the most reliable funding tools, even in times of turmoil.

Investors’ perspective : why CBs?

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Double recourse to issuer and cover pool;

Higher rating than unsecured debt;

Lower risk weighting for EAA CB bought by EAA banks;

Favourable treatment under Solvency II;

Generally better level of liquidity through larger issue size;

Favourable REPO treatment at ECB and other Central Banks;

Basel III eligible as liquid asset as Level II 40% cap & 15% hc

No risk of bailing in.

Development of covered bonds by underlying collateral

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Source: ECBC Fact Book

Mortgage covered bonds outstanding 2011

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Source: ECBC

Poland

Slovakia

Hungary

Cyprus

Czech Republic

Austria

Finland

Greece

Ireland

Portugal

Italy

Netherlands

United Kingdom

France

Sweden

Germany

Denmark

Spain

0 100,000 200,000 300,000 400,000

Mortgage covered bonds as % of residential loans outstanding in 2011

14

Source: ECBC / EMF

LatviaPoland

NetherlandsUK

ItalyAustria

GermanyHungaryFinlandIrelandFranceGreece

Weighted AveragePortugalSlovakia

CyprusCzech Republic

SpainSweden

Denmark

0.00% 20.00% 40.00% 60.00% 80.00% 100.00%

Contact details

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European Covered Bond Council (ECBC)

Avenue de Cortenbergh, 71B-1000 Brussels

Belgium

[email protected]+32 2 285 40 49

http://ecbc.hypo.org - www.ecbc.eu

European Covered Bond Council (ECBC)

Avenue de Cortenbergh, 71B-1000 Brussels

Belgium

[email protected]+32 2 285 40 49

http://ecbc.hypo.org - www.ecbc.eu