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                    [post_content] => 


 






These are videos from recent covered bond conferences and other events that relate to Canadian or U.S.$ covered bonds.




        
	
	




European Covered Bond Directive • Euromoney







Covered bonds and securitisations are easily confused • Euromoney







TCB Roadshow 2022 | The implications of growth: Canadian covered bonds in 2022 and beyond







Mayer Brown Webinar • 2020
Covered Bonds Update in the United States
Jerry Marlatt and Laura Drumm







US $ covered bonds – back again • Euromoney 2019







Equal treatment for non-EU covered bonds? What’s needed? • Euromoney 2018







 Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Concerns about the Covered Bond Directive.






 Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Outlook for the Canadian covered bond market and prospects for the U.S. market






 Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Impact of MREL and TLAC on covered bond issuance.






Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Keynote Address by Sandra Johnson, FHFA 







 Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Interview with Sandra Johnson, FHFA







 Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Interview with Jerry Marlatt on "What Hope for America".






Congressman Jeb Hensarling On Covered Bonds • 2010







Congressman Scott Garrett On Covered Bonds • 2010







Garrett Introduces Covered Bonds Amendment • 2010















 
    






    
  
   

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Resiliency of Canadian Covered Bonds





In the current world of sharply rising interest rates and a possible recession, questions have arisen about the resiliency of the cover pools for Canadian covered bonds.  Additional focus is brought to this question by the declining housing values in Canada -- Vancouver and Toronto in particular have seen reported 15 to 20 per cent declines in house prices from recent peaks.





Canadian covered bonds take their strength from several factors, not the least of which is the conservative nature of property investors in Canada, combined with fairly strict underwriting standards set by OSFI.  This has resulted historically in a typical annual loss rate for residential mortgage pools for most banks in basis points in the single-digit or low double-digit range.    





This low loss experience is supported by the full recourse nature of Canadian mortgage loans.  A mortgagor under Canadian law is personally liable for full payment of the mortgage loan if the loan is foreclosed on and liquidated at a loss.  Unlike the case in many U.S. States, a Canadian property owner cannot turn over the keys to house and walk away free of the debt.  





Another protection for Canadian cover pools is the monthly Asset Coverage Test that each program must pass.  If the value of eligible mortgage loans in the cover pool does not exceed the outstanding amount of covered bonds by the required overcollateralization amount, the test is failed.  Defaulted mortgage loans are not included in test. If the test is failed, the issuing bank is required to transfer additional, non-defaulted eligible mortgage loans to the cover pool.  Thus, the cover pool is constantly refreshed with performing mortgage loans protecting the value of collateral backing the covered bonds.





More protection is provided by the requirement that an eligible mortgage loan for Canadian cover pools must have a loan to value ratio not exceeding 80%, measured each month based on an index of current property values in the location of the property.  If the loan to value ratio exceeds 80% at any time, only only the portion of the loan not exceeding 80% of the value of the property is included in the cover pool for the calculation.  This means that the value of the cover pool is protected from declining property values.





Moreover, the typical average loan to value ratio of mortgage loans in cover pools for Canadian covered bonds is between 50% and 60%, which provides a substantial buffer before loan amounts are reduced in the cover pool because they fail the loan to value maximum for eligibility.  Statistical information on cover pools is available in the monthly report provided to investors by each of the Canadian banks. 





Lastly, in addition to strong cover pools, investors in Canadian covered bonds hold exposures to banks that operate in a conservative banking environment.  Canadian banks came through the financial crisis of 2008 in excellent shape and continue to be highly regarded in international capital markets.  Banking regulation in Canada contributes to the conservative environment with a with a regulatory approach that prioritizes stability. The recent tightening of mortgage loan underwriting evidences this caution.





This collection of protections is what supports the perception of quasi-sovereign risk for Canadian covered bonds.







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A Smashing Year for the Canadians





2022 was a remarkable year for Canadian covered bond issuers. The Canadians issued 68 series of covered bonds in 2022 for an equivalent total of C$100,515 million, more than doubling the 30 offerings of 2021. There were 58 offerings in 2020, but 25 of those were retained offerings for repo with the central bank, so don't count as public offerings.





In 2021, the Canadians were 20 per cent of the global market in covered bond issuance.  While the final numbers for 2022 are not yet available, with 68 offerings it is likely that the Canadian banks have not slipped from that position.





In 2022, the Canadians issued in six different currencies: USD, A$, C$, CHF, £, and €. Euro was the most popular currency, with 29 offerings for €32,368 million, followed by the USD with 14 offerings for $24,705 million. RBC was the most active issuer with 18 offerings, followed by BNS with 14 offerings.





Some of the motivation for issuance likely was replacing funding obtained at the beginning of the pandemic from the Canadian central bank in 2020, when about C$90,000 million of covered bonds was taken to the central bank by the Canadian banks.  Most of those loans from the central bank were two-year loans.





The elevated Canadian covered bond issuance was also responsible in large part for the largest U.S. dollar covered bond issuance since 2012. With a total U.S. dollar covered bond issuance of $32,500 million in 20 offerings in 2022, the Canadian banks accounted for $24,705 million in 14 offerings, well above their typical 50% of the market.  





In 2023, Canadian banks have 43 series of covered bonds maturing, 16 of which are in euros and 13 in Canadian dollars.  Of the maturing Canadian dollar series, ten of the series, representing C$33,500 million, were retained covered bonds transferred by repo to the central bank.  With so many series maturing next year, it likely that 2023 is going to be another very active year for Canadian banks in covered bonds.











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A Blistering Pace in 1Q22



It was a notable first quarter for Canadian covered bond issuers: 19 issuances across dollars, sterling and euros [see the table below].  All six of the major Canadian banks issued bonds.  On a Canadian dollar equivalence basis, the banks issued C$38.7 billion. Continuing a trend set last year, the Canadians represented 20% of covered bond offerings for the quarter — punching well above their weight.

This activity is probably partly attributable to the heavy retained issuance by the banks at the start of the pandemic in March and April 2020, when nearly C$90 billion was taken to the central bank for funding. This was the inaugural covered bond repo program by the central bank. Issuance limits were temporarily increased at the time to support the central bank program and provide enhanced liquidity to the banks. Most of those covered bonds had two year maturities and are running off this year.





Pricing
Issuer
Series
Cur.
(mm)
Coupon
Maturity
Tenor
Spread
Type






2022-03-30
National Bank of Canada
CBL18
$
1250
2.900
2027-04-06
5yr
+65
144A




2022-03-29
Bank of Montreal
CBL28
€
1750
1.000
2027-04-05
5yr
+8
Reg S




2022-03-17
Toronto-Dominion Bank
CBL34
€
2500
0.864
2027-03-24
5yr
+11
Reg S




2022-03-17
Royal Bank of Canada
CB69
€
150
1.296
2037-03-24
15yr
+15
Reg S




2022-03-17
Royal Bank of Canada
CB70
$
1500
2.600
2027-03-24
5yr
+65
144A




2022-03-15
Royal Bank of Canada
CB68
€
2000
0.625
2026-03-25
4yr
+9
Reg S




2022-03-08
Bank of Nova Scotia
CBL42
€
2000
0.450
2026-03-16
5yr
+10
Reg S




2022-03-03
CIBC
CBL40
$
100
SOFR+45
2025-03-10
3yr
+45
144A




2022-03-03
CIBC
CBL39
€
2500
0.375
2026-03-10
4yr
+6
Reg S




2022-03-02
Bank of Nova Scotia
CBL41
$
2250
2.170
2027-03-09
5yr
+58
144A




2022-03-02
Bank of Montreal
CBL27
£
600
SONIA+40
2027-03-09
5yr
+40
Reg S




2022-02-02
Bank of Nova Scotia
CBL36-2
€
100
0.623
2041-10-15
20yr
+16
Reg S




2022-02-01
FCDQ
CBL14
€
750
0.250
2027-02-08
5yr
+5
Reg S




2022-01-20
National Bank of Canada
CBL17
€
1000
0.125
2027-01-27
5yr
+5
Reg S




2022-01-19
Bank of Montreal
CBL26
€
2750
0.125
2027-01-26
5yr
+6
Reg S




2022-01-18
Royal Bank of Canada
CB67
€
2000
0.125
2027-01-25
5.25yr
+6
Reg S




2022-01-17
Bank of Nova Scotia
CBL39
£
1300
SONIA+100
2026-01-26
4yr
+28
Reg S




2022-01-17
Bank of Nova Scotia
CBL40
€
1250
0.375
2030-03-26
8yr
+10
Reg S




2022-01-11
CIBC
CBL38
$
2500
1.846
2027-01-19
5yr
+48
144A/Reg S







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                    [post_content] => 













Critical Liquidity Source in Times of Stress





In the past ten days, covered bonds have shown their value in a crisis for the Canadian banks. They have issued covered bonds in Europe at least seven times in that last ten days. When senior debt and ABS is difficult to bring to market, covered bonds have a ready investor base. Covered bonds represent a flight to quality when markets are difficult. The Canadians have been so successful that they have irritated European funding officials. See the story in Global Capital.














Canadian banks survived the last financial crisis in better condition than perhaps any other OECD banking system. And the Canadian banking system, although relatively small, remains one of the preeminent banking systems in the world. The six major Canadian banks dominate the banking market in Canada. They are quite conservative. They tend to follow each other and particularly the traditional leader, Royal Bank of Canada. Compared, for example to the banking system in the United States, the Canadian banks have had remarkably few crises. It is a close-knit community and a comfortably profitable business in Canada.





When the crisis created by the coronavirus COVID-19 began to envelope the Western world, the Canadian banks moved quickly to shore up their liquidity.   An important tool for accomplishing this has been covered bonds.  In uncertain times, investors tend to seek sovereign paper in a flight to quality.  Covered bonds provide an attractive alternative to sovereign paper.  Covered bonds have a similar risk profile to sovereign bonds but generally provide better yields.  





Why did the banks choose Europe to issue their bonds?  Because of favorable currency swap costs.  And the market proved quite receptive.  Even though there were at times two or three Canadian banks in the market at same time, they all managed to issue benchmark-size offerings at favorable rates.  There was clearly an investor hunger for safe assets with a decent yield and the Canadians met that need quickly.  They were in and out of the market before their European competitors had even contemplated challenging the market turmoil.





And although the Canadians deserve credit for moving quickly, the moral of the story is really the value of covered bonds in stressful times.  As it did during the financial crisis, the covered bond market continues to be open and available to provide critical liquidity  when other finding sources are spotty or not available at all.  And just to note, this is a funding tool that U.S. banks do not have access to. 







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A New Narrative













A lot of ink has been spilled assigning liability for the financial crisis to sub-prime mortgage loans.The role of sub-prime mortgage loans was so prominent that it has been called the 'sub-prime crisis'.  But a recent study by the New York Federal Reserve Bank shows how wrong this conclusion is.  





In a paper published on Liberty Street Economics, "Did the Subprime Borrowers Drive the Housing Boom?", (https://libertystreeteconomics.newyorkfed.org/2020/02/did-subprime-borrowers-drive-the-housing-boom.html) the authors demonstrate quite clearly, for example, that inflated appraisals were not concentrated in sub-prime mortgages.  









They also demonstrate that the boom in house prices and sub-prime mortgage loans occurred in different places (see the maps below).  They show a clear negative correlation between house price appreciation and the sub-prime share of home purchase mortgages.  





As the authors say, "Our analysis contributes to a 'new narrative' that rapid U.S. house price appreciation during the 2000s was mainly driven by prime borrowers.  Hence, policy prescriptions intended to limit access to credit for marginal borrowers may be insufficient by themselves to prevent a future housing boom." 
















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BNS SEC Filing Expires





On September 9, 2016, the SEC registration statement of Bank of Nova Scotia for its covered bonds expired without renewal.*  This was followed by the pricing on September 13, 2016, of a $1.5 billion offering of five year covered bonds by BNS in a 144A private placement.  Apparently BNS, like BMO, has abandoned the SEC registered format for its covered bonds.  



On inquiry, BNS stated that .......  This action now leaves Royal Bank of Canada as the sole Canadian bank with an SEC registered covered bond program.*  



The RBC program was inaugurated in September 2012 to much acclaim.  While RBC has not publicly stated what action it will take regarding the loan-level disclosure requirements imposed under Regulation AB starting in November 2016, the response of BMO and BNS suggest that there may be no further issuances of SEC registered covered bonds after November.  This will certainly be a disappointment to investors and will increase the funding costs of the banks.




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BMO Abandons SEC Filing





On December 16, 2015, Bank of Montreal quietly withdrew its SEC registration statement for covered bonds.  The registration statement became effective on November 8, 2013.   The registration statement was originally filed in July 2013.   Prior to the filing, BMO had obtained a no-action letter from the SEC staff to permit the Guarantor to register its Guarantee on the same shelf registration statement as the bond to be issued by the bank. 



On inquiry, BMO reports that there were a number of reasons for their withdrawal of the registrations statement.   One of the reasons for the withdrawal was the prospect of needing to comply with the loan-level disclosure requirements of Regulation AB beginning in November 2016.   That compliance requirement arose from the conditions imposed on BMO by the no-action letter.   BMO cited the uncertainty of its ability under Canadian law to provide the information required and the significant cost of altering its systems nationwide to collect the information.



This is the first of the three Canadian banks with SEC registration statements to react publicly to the new loan-level disclosure requirements imposed by the SEC.   (See Regulation AB II and Canadian Covered Bonds-- the end of SEC registered covered bonds?).   This action suggests that the other two banks, Bank of Nova Scotia and Royal bank of Canada, may cease issuing SEC registered covered bonds by the November 2016 date.   Neither of the two banks, however, has publicly stated its intent in this regard.  



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EU Covered Bond Framework





December 2019 saw the enactment in European Union of a Covered Bond Framework consisting of a Covered Bond Directive and a Covered Bond Regulation to harmonize covered bond legislation across the Member States of the EU. Member States are required to adopt and publish laws, rules and regulations by July 8, 2021 necessary to comply with the Directive, which shall be effective not later than July 8, 2022.

Covered bonds compliant with the Covered Bond Directive are treated preferentially under the Capital Requirements Directive (as amended by the Covered Bond Regulation) and may qualify for credit quality step 1 under the Liquidity Coverage Requirement Regulation.

Covered bonds are defined under the Directive to be covered bonds issued by credit institutions subject to the Capital Requirements Directive. Accordingly, covered bonds issued by Canadian or Australian or other third-country issuers of covered bond will not qualify for preferential treatment under the Capital Requirements and will therefore be less attractive to investors that are EU credit institutions than covered bonds issued by EU credit institutions.

This disadvantage is addressed under the Directive by a requirement that "[t]he Commission should therefore, in close cooperation with EBA, assess the need and relevance for an equivalence regime to be introduced for third-country issuers of, and investors in, covered bonds". And that "[t]he Commission should, no more than two years after the date from which Member States are to apply the provisions of national law transposing this Directive, submit a report thereon to the European Parliament and to the Council, together with a legislative proposal, if appropriate." The report of the Commission on the need for an equivalence regime therefore needs to be delivered to the European Parliament no later than July 8, 2024. There is no basis to predict when equivalence legislation, if any, might be adopted.

The bottom line is that third-country issuers from Canada, Australia and other jurisdictions are likely to be at a disadvantage until at least 2025.



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U.S. Legislation in 2020





Where are we with U.S. legislation for covered bonds starting 2020?  



First, we are in a highly contentious and partisan presidential election year.  A few days ago CNN reported that there was a tie for the most admired person in the United States: Donald Trump and Barak Obama.  The division is deep and wide.



Second, the possibility for bi-partisan legislation is not high, but there has been some bi-partisan legislation, even during the impeachment hearings in the House. For example, the amended North America Free Trade Agreement was  passed.  So there is some possibility of passage of legislation, as there always is even in an election year.



Third, it is unlikely that covered bond legislation will be separated from GSE reform, because GSE reform will inevitably examine housing finance and the role of the government in housing finance.  Until that is settled it probably makes little sense to initiate a new form of housing finance in the form of covered bonds.  



It seems very unlikely that covered bonds  would not be a viable form of housing finance in a post-GSE reform world, but why put the cart before the horse.



That leaves us with the question of the prospects for GSE reform in 2020. The GSEs have now been in conservatorship for more than 10 years.  The current situation of the GSEs is obviously acceptable to many sectors.  Nevertheless, there remains a desire to resolve the situation and clean up this unfinished business.



In June 2018, the President of the United States released a reform and reorganization plan entitled “Delivering Government Solutions in the 21st Century.”  This plan includes a proposal to convert Fannie Mae and Freddie Mac into private sector entities, to provide an express government guarantee of mortgage loans to Fannie, Freddie and other qualifying entities, and to restructure financial support for low and moderate income family mortgage loans into the Department of Housing and Urban Development.  



In March 2019, the President issued a Presidential Memorandum directing the Secretary of the Treasury to develop a plan to reform housing finance.  In September 2019, the Department of the Treasury issued The Treasury Housing Reform Plan.  While the Plan provides many specifics for the resolution of the conservatorship of Fannie Mae and Freddie Mac, much of the Plan is dependent on enabling legislation, the prospects for which appear rather bleak in this strained political environment.  As part of the plan, the Federal Housing Finance Agency, as Conservator of Fannie and Freddie, exercised its administrative power in the fall of 2019 to permit the GSEs to retain their profits and begin rebuilding their capital as an initial step to resolving the conservatorships.  This step increases the pressure on Democrats in Congress to agree to a resolution of Fannie and Freddie.  



In 2020, we may see additional administrative action from FHFA that will increase pressure on the Democrats to come to the table on GSE reform.  Democrats will be reluctant however to agree to any significantly undesirable changes to the GSEs while there exists a fair prospect for taking over the White House this year and taking more control of GSE reform.  Accordingly, we are most likely waiting until 2021 to see any real movement in GSE reform.  



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U.S. Housing Overview





The continued conservatorship of Fannie Mae and Freddie Mac exposes taxpayers to continued risk.   The failure to address the GSEs and release them from the conservatorship evidences a significant failure of political will. 



 This chart from the latest monthly report from the Housing Finance Policy Center at the Urban Institute provides a fine summary of the government dominance of U.S. residential housing finance.   This imbalance with private sector financing is imposing significant risk on the GSEs and therefore on the government and taxpayers without analysis or justification.   There should be a fundamental analysis of the government's housing policy and how much risk needs to be taken by the taxpayers in order to achieve the government's goals.   







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Covered Bonds in the United States - Latest News



























  

   




Updated: 3/24/2021










 

See Mayer Brown's 
Covered Bonds - At A Glance for U.S.$ covered bond statistics for the period 2010 through 2020.

Noteworthy is the heavy retained issuance in 2020 in C$ for repo with the Bank of Canada.









Commentary


Mar 2020- Recent Posts. 
 See our most recent posts on covered bonds:







Jan 2019- The American Banker is reporting that “There’s now a confluence that’s been built around the need to really do a deep dive on national housing policy itself, which housing finance is just one important element,” according to David Jeffers, the executive vice president of policy and public affairs at the Council of Federal Home Loan Banks. 





Jan 2019- Urban Institute Report on U.S. Housing.  See our new post ( U.S. Housing Overview.) on the Urban Institute Report on U.S. housing and the dominance of the GSEs in housing finance.   The GSEs are virtually the only game in town.  Is that risk to the taxpayers worth it?  Why?







Dec 2018- NY Fed Study on Housing Finance  The New York Federal Reserve Bank has released an Economic Policy Review entitled The Appropriate Role of Government in U.S. Mortgage Markets.  Given the conservatorships of Fannie Mae and Freddie Mac, one wonders why it took so long to ask this question.  Nevertheless, this review represents a welcome attempt to inject some rationality into U.S. housing finance.  As the Economist reported yesterday, we have accidentally nationalized the U.S. mortgage market at a  cost of something like one percent of GDP annually.  It is high time to rely more on the private capital markets and less on government fiat for housing finance.  The Economist believes the taxpayer savings would be substantial. 

Starting on page 63 there is a  comparison of U.S. and Danish mortgage financing and a recommendation that policy makers look at the Danish use of capital markets to finance mortgage loans using covered bonds.





July 2018- GSE Progress?  The White House has proposed a plan for reorganization of the Government, which includes a plan for reorganization of the GSEs that has a political twist that might actually make a difference.  "Reform of the Federal Role in Mortgage Finance" begins in page 79 of the White House proposal.  The plan would fully privatize Fannie Mae and Freddie Mac and give them access, together with other private entities, to a Government guarantee for a fee. Under the plan a new Federal entity would create and regulate a market for Federal guarantees. 

The interesting political twist is that Fannie Mae and Freddie Mac would not longer be responsible for assisting low income borrowers.   Instead that role would shift to the Department of Housing and Urban Development.  Fannie and Freddie would lose their Federal charters and would no longer be the focus of political infighting over federal assistance for low income residential mortgage loan borrowers.  Perhaps with the removal of that responsibility Fannie and Freddie will become less political and some real progress could be made in creating a rational structure for providing Federal support for residential mortgage loans. 



Jan 2018- What a difference a year makes! - As we move into 2018 there isn't a whisper of covered bond legislation in the United States.   Nothing!    The resurrection of the GSEs in their old form seems to on the agenda.    Amazing how short memories are.    All is forgiven.    $180 billion of bail-out cash is no big thing.   We could do it again if need be, but of course this will never happen again.   Everyone is born again!    And what is the definition of "madness"? 


Jul 2017- Six Months In - After strong rumors in January, there has been no subsequent discussion of covered bonds in this administration.  There has been some indication that the administration will tackle the GSEs, but no movement.  The Financial Choice Act passed the House on June 8, but seems to have little support in the Senate.  It addresses primarily repeal of portions of Dodd-Frank, but doesn't address the GSE.  All of the energy is spent on health care and taxes.  There is little left for housing finance.



Jan 2017- New Administration - what does it mean? Still too early to tell.  Treasury Secretary-designate Mnuchin indicated in his confirmation hearing testimony that the administration intended to move to address Fannie Mae and Freddie Mac.  There has also been some quiet indications that covered bonds are again on the agenda.  However, it is still early days, too early to know if covered bonds will play a role in a new housing finance system.
 



Nov 2016- Trump won?! What!?  Really?! Whoa!  Now what? And what does it mean for covered bonds? What does it mean for the GSEs?  Good questions! But not questions we have answers to right now.  It's too soon.


It would not be a surprise to see the Republicans in Congress tackle GSE reform.  But the nature of the reform is not clear.  It is likely that some reduction in the role of the Government in housing finance would be part of the reform, but this will be a contentious issue with the Democrats and one they might filibuster in the Senate, so it will take some support from Democrats to reach a 60-vote majority needed to defeat a filibuster.  That means compromise somewhere to bring in the necessary Democrats.



The covered bond picture is more nuanced.  First, the role of the GSEs in housing finance has to be reduced before the banks will look to other means of finance for mortgage loans.  Second, the champion of covered bonds over the last six years has been Representative Scott Garrett (R-NJ), who was defeated in the election and will not be returning to the House next year.  There is no apparent successor to pick up the baton.  With an expected heavy focus on reducing banking regulation, covered bond legislation may never see the light of day.  So keep your fingers crossed for someone to perceive the benefit of covered bonds in a changed housing finance framework.


    July 2016- 2016  is of course a Presidential election year in the United States. It seems pretty unlikely, therefore, that we will see any progress in 2016 on covered bond legislation, in part also because it is unlikely we will see any movement on GSE reform.  Particularly GSE reform turns on the outcome of the election and covered bond legislation seems closely tied to GSE reform.  See Why is CB legislation tied to GSE reform?  Unfortunately, it looks like a long wait until 2017 for covered bond legislation in the United States, notwithstanding the positive comment from Rep. Scott Garrett (see below).


    Nov 2015- Rep. Scott Garrett reportedly told the audience at a mortgage industry conference in New York on November 12 that with the lifting of the federal debt ceiling it might be possible now to pass a covered bond bill in the Senate. The conference was the 2nd Annual Private Label RMBS Reform Symposium, sponsored by the Structured Finance Industry Group and IMN.


         Feb 2015- Why do investors like covered bonds? - What is it about covered bonds?


	 Feb 2015- Why not covered bonds? - What's to lose?


	Jan 2015- Congress schedules covered bond review.  With the beginning of the new  Congressional term, the House Financial Services Committee released its Oversight Plan, which includes a statement that the "Committee will examine the potential for covered bonds to increase mortgage and broader asset class financing, improve underwriting standards, and strengthen U.S. financial institutions."  See the related article posted on January 23 in The Covered Bond Report.
  

       Canada Housing Overvalued - The Bank of Canada reports that Canadian housing is up to 30% overvalued.   However, the Bank says that household imbalances remain the most important risk to stability.


	Use CBs to Restore PLS - Can covered bonds assist the recovery of the PLS market by allowing the GSEs to shrink faster?


	GSE Reform - A disquieting process


	Mortgage Rates - Are they uncompetitive?


	US Legislation - Why is legislation taking so long? Does the U.S. not see the benefit of covered bonds?


	Pass-Through CBs - Given the long RMBS history in the U.S. would pass-through covered bonds work here?


	Housing Bubble? Is there a housing bubble in Canada?






Non-Canada US$ Issuers


        Jun 2017- The first half of 2017 has seen issuance from Deutsche Pfandbriefbank AG (twice), LBBW, United Overseas Bank, DnB Boligkreditt, Stadshypotek AB, and SR Boligkreditt for a total of $5.3 billion.  Issuance volume and frequency is largely determined by cross currency swap costs. 




Hot Topics


	CBs as HQLA - should covered bonds qualify in U.S. as high quality liquid assets for LCR purposes?

	Encumbrance - why such a hot topic?

	Anemic RMBS - CMBS and CLOs are booming, but not RMBS. What does that tell us?












Canadian Issuers

maple leaf
     Jun 2017- 2017 started off strong for the Canadian banks with six offerings by the ninth of January and two more in March.  However, since then they have been quiet, with no issuance at all.  Canadian 'bail-in' proposals have been published and that may account for some their absence from the market as they reconsider their funding strategies.


Dec 2016- 
2016 was a good year for Canadian issuance of covered bonds.  Canadian banks came to the market with 34 offerings of covered bonds in $, €, £, C$ and A$ currencies.  Five of those offerings were reopenings of existing series of covered bonds by CIBC, RBC and TD.  The distribution of offerings across currencies was as follows:





Currency	# Offerings	Amount



€	14	12,861


$		6		9,250


C$		3	4,500


£		10		2,625


A$		1		400



See Canadian Issuance.




     Feb 2016- Change Canada's 4% Limit? OSFI is apparently considering raising the 4% of total assets limit on the issuance of covered bonds. See OSFI to Reconsider 4% Limit?


 
     Jan 2016- 2016 began with a flurry of Canadian offerings. Seventeen offerings in all in the first two weeks; six covered bonds: TD Bank CBL10 (€1.000B), RBC CB28 (€0.100B), CIBC Tap CBL8 (€0.100B), BNS CBL11 (£0.400B), BMO CBL7 (€1.500B), BNS CBL12 (€1.500B); and eleven senior notes: BNS $1.000B, $0.500B,  €0.050B,  £0.300B and  €1.500B; 
  BMO £0.217; TD Bank $0.750B and $0.500B; and RBC $1.250B,  €500 and  £200. See CDN Issue Details and MTNs.  A pretty remarkable showing in a volatile market for the start of 2016. Perhaps the best commentary on the overall market conditions one day last week came from Citibank MD Laura Drumm: "Well, that was ugly ...".
     




Regulatory Developments


	BCBS - Basle has announced increased capital requirements for securitization exposures.  See the full report.

	Final Risk Retention - The SEC has finalized its risk retention rule for securitizations.  See the full text of the final rule. 

	Reg AB II and Covered Bonds - Generally Reg AB II is not going to apply to covered bonds. Canadians?

	Final Reg AB II - SEC finalizes the amendments to Regulation AB

        U.S. Treasury - United States Department of the Treasury has requested comments on the private sector development of a well-functioning private label securities (PLS) market for residential mortgage loans.  See the original request.

	LCR in Canada Covered bonds qualify for LCR Level 2A.

	Volcker Rule - only foreign bank covered bonds are carved out of the prohibitions in the rule?






Technical Notes















  
    
    

  
   



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The recent amendments to Regulation AB (commonly referred to as “Reg AB II”) were a policy response to the perceived inadequacy of securitization disclosure prior to the financial crisis and a response to a request by very large investors for extensive, detailed information about the assets in a securitization.  The adoption of the changes to Regulation AB was only possible after the SEC negotiated protection from the Consumer Financial Protection Bureau (the “CFPB”) for issuers filing the data required by the SEC.  The CFPB statement provides that an issuer filing data in accordance with the SEC rules will not be in violation of the financial privacy laws.  



The result of the amendment is a package of regulations that call for the disclosure of loan-level data that varies by asset class.  In the case of assets that are residential mortgage loans, the rules call for the disclosure of 272 data fields for each mortgage loan, including the first two digits of the postal zip code for the property.  



In a study conducted by the SEC staff prior to the adoption of the amendments, the staff calculated that disclosure of the full five digit postal zip code for a property would result in an 80% likelihood that the identity of the borrower would be discernable.  With the reduction to disclosure of only the first two digits of the postal zip code, the staff concluded that there was still a 20% likelihood that a borrower could be identified.  Thus the need for the SEC to obtain CFPB protection for issuers.  



But what has this to do with covered bonds?  After all, covered bonds are not securitizations, but rather special form of secured debt.  The answer is somewhat complex.  




In 2012, Royal Bank of Canada filed a registration statement with the SEC for covered bonds.  Before filing the registration statement, however, RBC filed a request for no action relief with the SEC to enable RBC Covered Bond Guarantor Limited Partnership, the entity that would hold the cover pool of mortgage loans and guarantee the bonds issued by RBC, to register its guarantee on the same SEC Form F-3 used by RBC to issue the bonds.  Without relief, the Guarantor was ineligible to use Form F-3 as it did not have the required history of filing information with the SEC.  



The SEC granted the requested relief in May 2012 on the condition that RBC and the Guarantor agree to comply with the requirements of specific provisions of Regulation AB.  The list of  provisions included Items 1111 and 1121, which were subsequently amended by Reg AB II to require the disclosure of loan-level information.  Because of Items 1111 and 1121 and because the assets in the cover pool held by the Guarantor are residential mortgage loans, RBC will be required to disclose for each offering and monthly thereafter 272 data fields of loan-level information for each loan in its cover pool if it issues SEC-registered covered bonds after November 23, 2016.  Currently there are about 350,000 loans in the RBC cover pool.  



Following the approval of the RBC registration statement by the SEC in 2012, the Bank of Nova Scotia and the Bank of Montreal each filed a no action request with the SEC to establish similar SEC-registered covered bond programs.  The requested no action relief was granted upon similar conditions and the BNS registration statement was approved in September 2013.  BMO withdrew its registration statement prior to approval by the SEC in December 2015.  



Unfortunately for the Canadian banks many of the required 272 data fields are inapplicable to Canadian residential mortgage loans.  Other fields relevant to Canadian loans would have to be added.  And unlike an RMBS transaction, many of the loans in the cover pool are not newly-originated; some of the loans will have been originated 15 or 20 years ago.  In many cases, information of the type required by the SEC was not collected when the loans were originated or if collected was not uploaded to electronic data systems; in that case the information will only be found in physical loan files scattered in offices across the country.  To the extent that the data is not collected for newly originated residential mortgage loans, company-wide systems and procedures would have to be modified in order to obtain the data – an expensive and disruptive process for such large and geographically diverse organizations.  



The fact that the 272 data fields required by the SEC are in many cases not relevant to Canadian mortgage loans is not by design.  Instead, it is the result of a very difficult rule drafting process for the SEC, particularly in the financial privacy area.  The initial rule proposal was published in 2010; the final rule was not adopted until 2014 after extensive comments and redrafting of the rule.  It was all the SEC could do to focus on US securitizations.  Had the SEC tried to address also assets and issuers in other jurisdictions, the drafting process would likely still be underway.  The only practical approach was to limit the analysis and the drafting to US securitizations if the changes were ever to be adopted.  



The result, however, has the effect of building a regulatory wall around the US.  As of the posting date, only one issuer had filed a registration statement with the SEC for securitization of residential mortgage loans, which had not been declared effective, and only a single non-US issuer had filed a registration statement for any asset type.  The additional burden created for non-US issuers is substantial, particularly for residential mortgage loans.  Each jurisdiction has its own financial privacy laws and the protection offered by the CFPB to issuers filing with the SEC does not protect non-US issuers from financial privacy laws in their home jurisdictions.  And then there is the expense and disruption of collecting the data.  



In the end, the decision to issue SEC-registered covered bonds becomes a cost-benefit analysis.  Does the lower coupon on SEC-registered covered bonds compared to 144A or Reg S covered bonds justify the expense and effort of complying with the new loan-level disclosure requirements of Regulation AB?  How many offerings would be necessary over what period of time to recover the cost of the changes?  Is cost recovery feasible given past levels of issuance of SEC-registered covered bonds?  



None of the Canadian banks have publicly answered these questions, so at this writing it is unclear what course they will follow in connection with their US dollar covered bond offerings.  If they conclude that SEC-registered covered bonds are not cost effective, it is likely they would take the alternative of issuing US dollar covered bonds under Rule 144A.  



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According to reports in The Cover and The Covered Bond Report, Canada is considering whether to increase the 4% limit imposed on covered bond issuance.  This limit was imposed by the Office of the Superintendent of Financial Institutions (OSFI) at the inception of covered bond issuance by Canadian banks in 2007 and remains unchanged today.  While the limit is the most stringent currently applied in the covered bond world, Canadian banks have nevertheless been active issuers of covered bonds as can be seen by the table below.






 
US$
EUR
GBP
CHF
A$
C$





	Issued (mm)*71,60044,0374,3752,0757,4504900
	



	Outstanding (mm)*39,60038,6134,3751,4005,1003,300
	





Source: www.us-covered-bonds.com/cdn_issue_details

* As of January 28, 2016.


  The current 4% limit is measured as the Canadian dollar equivalent amount of covered bonds outstanding divided by total assets.  The table below shows the covered bond issuance capacity remaining for each Canadian covered bond issuer as of December 2015.






 
BMO
BNS
CCDQ*
CIBC
NBC
RBC
TD
TOTAL





	Total Assets (mm)**641,881856,4971,318463,309216,0901,074,208862,5324,115,835
	



	Maximum Amount (mm)26,10033,6007,40018,2008,30043,50042,400179,700
	



	Outstanding Amount (mm)11,60022,2005,40010,7007,30031,30020,900109,400
	

		

	Used Capacity44.3%66.0%73.1%*59.0%87.8%71.6%60.9%60.9%
	

	

	Remaining Amount (mm)14,50011,4002,0007,5001,00012,40021,50070,300
	





Source: CMHC, Covered Bond Business Supplement, September 2015. 

*Note that CCDQ is subject to a different limit, which is set by Autorité des marchés financiers at EUR 5.0 billion. 

** As of October 31, 2015. 



In most major covered bond issuing jurisdictions there are no limits on the issuance of covered bonds.  Some jurisdictions, such as the United Kingdom and the Netherlands adopted issuance limits at the inception of their covered bond issuance, but have subsequently removed fixed limits.  In both jurisdictions today the issuance limit is determined on a case-by-case basis by financial authorities based on the condition of the issuer.  A few jurisdictions still retain a fixed limit: Australia at 8%, Greece at 20% and New Zealand at 10%.  No other country has a limit as stringent as that of Canada. See, ECBC, European Covered Bond Fact Book, 1.4 Factors Affecting Asset Encumbrance (2014) at pages 54-55.  


That all other issuers of covered bonds have the benefit of more accommodating regulation of covered bond issuance limits and Canadian covered bond programs have grown for nearly ten years without evidencing any problems, suggests that OSFI may be willing to increase its 4% limit.  The 4% limit increasingly appears overly restrictive.


Even under the existing tight limits on issuance, CMHC reports that covered bonds have become increasingly important as a source of funding for residential mortgage loans for Canadian banks.  Covered bonds have grown from funding 5% of residential mortgage loans in early 2013 to nearly 8% by mid-2015.  


With the growing use of covered bonds as a funding source for supporting mortgage loan origination, it is not surprising to see that OSFI is considering changing the current 4% limit.  If OSFI were to change to limit for issuance of covered bonds to 6% or 8% or 10%, the maximum capacity of each of the issuing banks would be as follows:





 
BMO
BNS
CCDQ*
CIBC
NBC
RBC
TD
TOTAL





	6% limit (mm)38,51351,38911,00027,79912,96564,45251,752246,950
	

		

	8% limit (mm)51,35068,52014,80037,06517,28785,93769,003329,267
	

	

	10% limit (mm)64,18885,65018,50046,33021,609107,42186,253411,583
	





*This assumes that the limit set by Autorité des marchés financiers is increased comparably. 


If OSFI were to raise the limit for covered bond issuance to 10% of total assets, that would create the potential for an additional C$320,683,000,000 of covered bonds outstanding based on current outstandings.  



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The Volcker Rule became effective on July 21, 2015.  There are two aspects to the Volcker Rule: a prohibition on proprietary trading and a limitation on sponsoring or investing in a 'covered fund.'  It is this second aspect of the Volcker Rule that concerns investors in covered bonds.  The Volcker Rule applies to banks in the United States, including the branches, subsidiaries and affiliates of foreign banks.  Even if the investor in a covered bond is not a bank subject to the Volcker Rule, if investment in the covered bonds is subject to the Volcker Rule,the secondary market liquidity for the covered bond can be adversely affected.
  


If the prospectus for the covered bond does not disclose whether an investment in the covered bond is limited under the Volcker Rule, how can you determine whether the Volcker Rule applies?  This can be quite a complex analysis.  Fortunately, Morrison & Foerster has written a helpful article on analyzing whether a covered bond is subject to the Volcker Rule.  See A user's guide to Volcker Rule complexities.
  


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Why is the adoption of covered bond legislation linked to housing finance reform?  Housing finance reform is all about the role of the GSEs.  While covered bonds certainly can be used to finance residential mortgage loans, they do not require any form of government support.  The consideration of the proper role of the government in housing finance can occur independent of covered bonds.  However, I hear from many sources that covered bond legislation would only be considered after GSE reform had been adopted or perhaps considered with GSE reform.  


There is no apparent logic to this position.  Covered bonds are a private sector financing technique that has proved very effective in other jurisdictions.  There is nothing in GSE reform that would be a necessary predicate to the issuance of covered bonds by U.S. banks.  Covered bond legislation would not touch the status of the GSEs.  It is possible that covered bond issuance by U.S. banks could develop into an attractive alternative to financing through the GSE and thus reduce the tension in GSE reform, but that would be beneficial to GSE reform.  


It seems as though both sides are determined to keep as much pressure on GSE reform as possible in order to achieve their objectives and not permit any private sector initiatives to sidetrack the discussion until the role of the government in housing finance has been solved.  But this seems to put the cart before the horse.  Shouldn’t the government intervene only where the private sector is not functioning properly?  Wouldn’t it make sense to let private sector initiatives develop first before assigning the government a role?  If we can agree that the answer to those two questions is yes, why not adopt covered bond legislation and see how the market develops while we debate how to wind down the GSEs and what would be the appropriate future structure for the government’s role in housing finance?


Certainly we can have a fulsome debate on how the government can support housing access for those who need assistance independent of how covered bond legislation is drafted.  Certainly if covered bonds, RMBS and the federal home loan banks fail to provide adequate private sector funding for residential mortgage loans there may be a need to consider a larger government role.  


It is not essential that covered bonds be enabled through legislation as it is possible to achieve covered bond issuance through securitization techniques, as has been done in other countries. See, e.g., Time for a US alternative.  However, investors will have more confidence in a covered bond sector established through legislation and the market may be expected to develop quicker with legislation.  Enacting legislation for covered bonds would be a low cost experiment that would have no harmful side effects.  Covered bond legislation, therefor, should be enacted before GSE reform is attempted so that we have a better chance to assess what works in the private sector before designing the government’s role in housing finance.  



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                    [post_title] => CDN Issue Details
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                    [post_content] => 



Updated: 2/21/2021




Canadian Legislative Bonds by Year(Issue Date)







2021



  
    

       BMO
       BNS
       FCDQ
       CIBC
       HSBC
       NBC
       RBC
       TD
       



   
        
        
        CBL12
        
        
        CBL15 Mar 25
        CB60 Jan 27
        


     
   
        
        
        
        
        
        
        
        
   

  






2020

>
        

  
    

       BMO
       BNS
       FCDQ
       CIBC
       HSBC
       NBC
       RBC
       TD
       


     
   
        CBL18 Mar 26
        CBL25 Jan 14
        CBL8 Mar 30
        CBL24-2 Mar 24
        CBL3 Mar 31
        CBL12 Mar 30
        CB47 Jan 21
        CBL29 Mar 26
   

     
   
        CBL21 Apr 7
        CBL26 Mar 18CBL9 Apr 14
        CBL25 Mar 27
        CBL4 May 14
        CBL13 Apr 20
        CB48 Jan 24
        CBL30 Mar 23
   

     
   
        CBL19 Mar 25
        CBL30 Mar 31
        CBL10 Sep 24
        CBL27 Mar 30
        
        CBL14 May 14
        CB49 Jan 30
        CBL31 Mar 23
   

     
   
        CBL20 Mar 25
        CBL28 Mar 25
        CBL11 Oct 7
        CBL28 Apr 2
        
        
        CBL50 Mar 24
        CBL32 Apr 3
   

     
   
        CBL23 Apr 17
        CBL29 Mar 22
        
        CBL30 Apr 14
        
        
        CB51 Mar 20
        CBL33 Apr 3
   

     
   
        CBL22 Apr 20
        CBL31 Apr 22
        
        CBL26 Apr 9
        
        
        CB52 Apr 6
        
   

     
   
        
        CBL27 Apr 1
        
        CBL29 Apr 24
        
        
        CB53 Mar 27
        
   

     
   
        
        CBL23-3 Apr 3
        
        CBL31 Apr 22
        
        
        CB54 Mar 27
        
   

     
   
        
        CBL13-2 Apr 9
        
        CBL30-2 Apr 30
        
        
        CB55 Mar 27
        
   

     
   
        
        CBL31 Apr 22
        
        CBL25-2 May 4
        
        
        CB56 Mar 27
        
   

     
   
        
        CBL32 May 22
        
        
        
        
        CB57 Apr 24
        
   

     
   
        
        CBL29-2 Apr 2
        
        
        
        
        CB58 Jun 1
        
   

     
   
        
        
        
        
        
        
        CB59 Jun 1
        
   

  






2019



  
    

       BMO
       BNS
       FCDQ
       CIBC
       HSBC
       NBC
       RBC
       TD
       


     
   
        CBL16 Jan 10
        CBL24 Jan 11
        CBL5 Jan 30
        CBL22 Jul 09
        CBL2 Sep 10
        CBL10 Jan 15
        CB40 Jan 29
        CBL24 Apr 10
   

     
   
        CBL17 Jun 15
        
        CBL6 Sep 26
        CBL23 Aug 1
        
        CB11 Jun 20
        CB41 Mar 14
        CBL25 Jun 24
   

    
   
        
        
        CBL7 Nov 26
        CBL24 Oct 28
        
        
        CB42 Jun 19
        CBL26 Jul 15
   

    
   
        
        
        
        
        
        
        CB43 Jun 27
        CBL27 Jul 15
   


   
        
        
        
        
        
        
        CB44 Sep 23
        CBL28 Jul 17
   


   
        
        
        
        
        
        
        CB45 Oct 3
        
   


   
        
        
        
        
        
        
        CB46 Dec 30
        
   

  






2018



  
    

       BMO
       BNS
       FCDQ
       CIBC
       HSBC
       NBC
       RBC
       TD
       


     
   
        CBL14 Feb 2
        CBL19 Jan 10
        CBL4 May 30
        CBL15-2 Jan 18
        CBL1 Nov 28
        CBL7 Mar 13
        CB36 Jun 8
        CBL18 Jan 27
   

     
   
        CBL14-2 Mar 28
        CBL20 Jan 22
        
        CBL19 Jan 24
        
        CBL8 Jul 25
        CB37 Jun 28
        CBL19 Mar 12
   

     
   
        CBL15 Apr 16
        CBL21 Mar 28
        
        CBL20 Apr 26
        
        CBL 9 Dec 14
        CB38 Sep 10
        CBL20 Jun 6
   

     
   
        
        CBL22 Oct 23
        
        CBL21 Jun 28
        
        
        CB39 Oct 22
        CBL21 Jun 7
   

     
   
        
        CBL17-2 Nov 13
        
        
        
        
        
        CBL22 Jun 6
   

     
   
        
        CBL23 Nov 19
        
        
        
        
        
        CBL23 Oct 22
   

     
   
        
        CBL23-2 Dec 13
        
        
        
        
        
        
   

  






2017



  
    

       BMO
       BNS
       FCDQ
       CIBC
       HSBC
       NBC
       RBC
       TD
       


     
   
        CBL11 Jan 11
        CBL18 Jan 13
        
        CBL15 Jan 10
        
        CBL5-2 Jan 12
        CB34 Jan 11
        CBL15 Jan 18
   

     
   
        CBL 12 Jul 18
        
        
        CBL16 Jul 17
        
        CBL 5-3 Oct 25
        CB35 Dec 8
        CBL16 Mar 6
   

     
   
        CBL13 Oct 26
        
        
        CBL17 Jul 27
        
        
        
        CBL17 Apr 3
   

     
   
        
        
        
        CBL18 Sep 7
        
        
        
        
   

  






2016



  
    

       BMO
       BNS
       FCDQ
       CIBC
       HSBC
       NBC
       RBC
       TD
       


     
   
        CBL7 Jan 14
        CBL11 Jan 24
        
        CBL8-2 Jan 18
        
        CBL5 Sep 27
        CB28 Jan 14
        CBL10 Jan 12
     

     
   
        CBL8 Apr 19
        CBL12 Jan 21
        
        CBL10 Mar 10
        
        CBL6 Sep 29
        CB27-2 Jan 21
        CBL11 Feb 3
     

     
   
        CBL9 Jun 15
        CBL13 Mar 10
        
        CBL11 Apr 19
        
        CB29 Feb 25
        
        CBL12 Mar 15
     

     
   
        CBL10 Oct 20
        CBL14 Apr 26
        
        CBL10-2 Jul 15
        
        
        CB30 Mar 11CBL12-2 Apr 21
     

     
   
        
        CBL15 Sep 14
        
        CBL12 Jul 25
        
        
        CB31 Mar 22
        CBL13 Apr 27
     

     
   
        
        CBL 16 Sep 20
        
        CBL13, Oct 18
        
        
        CB32 Apr 26
        CBL14 Jun 8
     

     
   
        
        CBL 17 Sep 30
        
        CBL14 Oct 19
        
        
        CB33 Sep 14
        CBL14-2 Aug 2
     

  






2015



  
    

       BMO
       BNS
       FCDQ
       CIBC
       HSBC
       NBC
       RBC
       TD
       


     
 
        CBL2 Jan 22
       CBL5-2 Jan 13
       CBL 3 Nov 19
       CBL4 Jan 15
       
       CBL3 Jan 26
       CB18 Feb 5
       CBL6 Apr 02
     


     

         CBL3 Jan 29
         CBL6 Jan 21
         
         CBL5 Jan 28
         
         CBL4 Apr 20
         CB19 Mar 23
         CBL7 Apr 16
      


     

        CBL4 Aug 5
        CBL7 Apr 14
        
        CBL6 Jun 15
        
        
        CB20 Mar 23
        CBL8 Apr 27
     


     

        CBL5 Sep 21
        CBL7-2 May 1
        
        CBL7 Jul 21
        
        
        CB21 Jun 17
        CBL9 Jun 15
     


     

        CBL6 Sep 28
        CBL8 Jul 23
        
        CBL8 Dec 7
        
        
        CB22 Jul 21
        
     


     

        
        CBL9 Aug 7
        
        CBL9 Dec 7
        
        
        CB23 Jul 20
        
     


     

        
        CBL10 Sep 28
        
        
        
        
        CB24 Jul 23
        
     


     

        
        CBL10-2 Sep 28
        
        
        
        
        CB25 Sep 16
        
     


     

        
        
        
        
        
        
        CB26 Oct 6
        
     


     

        
        
        
        
        
        
        CB27 Dec 2
        
     

  






2014



  
    

       BMO
       BNS
       FCDQ
       CIBC
       HSBC
       NBC
       RBC
       TD
       


     

         CBL1 May 9
        CBL1 Apr 2
        CBL1 Mar 7
        CBL3 Oct 15
        
        CBL2 Mar 25
        CB15 Jun 19
        CBL1 Jul 29
        

    

       
       CBL2 Sep 11
       CBL2 Oct 22
       
        
       
       CB16 Sep 23
       CBL2 Sep 18
     

    

       
       CBL3 Sep 17
       
       
        
       
       CB17 Sep 23
       CBL3 Sep 25
     

    

       
       CBL4 Nov 4
       
       
        
       
       
       CBL4 Oct 29
     

    

       
       CBL5 Nov 4
       
       
        
       
       
       CBL5 Nov 6
     


  




 

2013



  
    

       BMO
       BNS
       FCDQ
       CIBC
       HSBC
       NBC
       RBC
       TD
       

   
     

        
        
        
        CBL1 Aug 2
        
        CBL1  Dec 17
        CB10  Jul 23
        
        

     

         
        
        
         CBL2 Oct 22
        
         
         CB11  Aug 1
         
     

     

        
        
        
        
        
        
        CB12  Aug 9
        
        

     

        
        
        
        
        
        
        CB13  Sep 24
        
        

     

        
        
        
        
        
        
        CB14 Oct 22
        
        

  


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Updated: 2/21/2021







Canadian Legislative Bonds by Series (Issue Date)



  
     

        Series†
        BMO
        BNS
        FCDQ
        CIBC
        HSBC
        NBC
        RBC
        TD
     

     

        CBL1   
        May 9, 2014
        Apr 2, 2014
        Mar 7, 2014
        Aug 2, 2013
        Nov 28, 2018
        Dec 17, 2013
        *
        Jul 29, 2014
     

     

        CBL2   
        Jan 22, 2015
        Sep 11, 2014‡
        Oct 22, 2014
        Oct 22, 2013
        Sep 10, 2019
        Mar 25, 2014
        *
        Sep 18, 2014
     

     

        CBL3   
        Jan 29, 2015
        Sep 17, 2014
        Nov 19, 2015
        Oct 15, 2014
        Mar 31, 2020
        Jan 26, 2015
        *
        Sep 25, 2014
     

     

        CBL4   
        Aug 5, 2015
        Nov 4, 2014
        May 30, 2018
        Jan 15, 2015
        May 14, 2020
        Apr 20, 2015
        *
        Oct 29, 2014
     

     

        CBL5   
        Sep 21, 2015
        Nov 4, 2014
Reopen
Jan 13, 2015		
        Jan 30, 2019
        Jan 28, 2015
        
        Sep 27, 2016
Reopen
Jan 12, 2017
Reopen
Oct 25, 2017		
        *
        Nov 6, 2014
     

     

        CBL6   
        Sep 28, 2015
        Jan 21, 2015
        Sep 26, 2019
        June 15, 2015
         
        Sep 29, 2016
        *
        Apr 2, 2015
     

     

        CBL7   
        Jan 14, 2016
        Apr 14, 2015‡
Reopen
May 7, 2015‡		
        Nov 26, 2019
        July 14, 2015
        
        Mar 13, 2018
        *
        Apr 16, 2015
     

     

        CBL8   
        Apr 19, 2016
        July 23, 2015
        Mar 30, 2020
        Dec 7, 2015
Reopen
Jan 18, 2016		
        
        Jul 25, 2018
        Sep 19, 2012*‡
        Apr 27, 2015
     

     

        CBL9   
        Jun 15, 2016
        Aug 7, 2015
        Apr 14, 2020
        Dec 7, 2015
        
        Dec 14, 2018
        Dec 6. 2012*‡
        June 15, 2015
     

     

        CBL10   
        Oct 20, 2016
        Sep 28, 2015
Reopen
Sep 28 2015		
        Sep 24, 2020
        Mar 10, 2016

        Reopen
Jul 15, 2016		
        
        Jan 15, 2019
        Jul 23, 2013‡
        Jan 12, 2016
     

     

        CBL11   
        Jan 11, 2017
        Jan 14, 2016
        Oct 7, 2020
        Apr 12, 2016
        
        Jun 20, 2019
        Aug 1, 2013
        Feb 3, 2016
     

     

        CBL12   
        Jul 18, 2017
        Jan 21, 2016
        Apr xx, 2021
        Jul 25, 2016
        
        Mar 30, 2020
        Aug 9, 2013
        Mar 15, 2016

Reopen
Apr 21, 2016		
     

     

        CBL13   
        Oct 26, 2017
        Mar 10, 2016
Reopen
Apr 9, 2020		
        
        Oct 18, 2016
        
        Apr 20, 2020
        Sep 24, 2013‡
        Apr 27, 2016
     

     

        CBL14   
        Feb 2, 2018
Reopen
Mar 28, 2018		
        Apr 26, 2016‡
        
        Oct 19, 2016
        
        May 14,2020
        Oct 22, 2013
        Jun 8, 2016

Reopen
Aug 02, 2016		
     

     

        CBL15   
        Apr 16, 2018
        Sep 14, 2016
        
        Jan 10, 2017

        Reopen
Jan 18, 2018		
        
        Mar 25, 2021
        Jun 19, 2014
        Jan 18, 2017
     

     

        CBL16   
        Jan 10, 2019
        Sep 20, 2016
        
        Jul 17, 2017
        
        
        Sep 23, 2014
        Mar 6, 2017
     

     

        CBL17   
        Jun 19, 2019
        Sep 30, 2016
Reopen
Nov 13, 2018		
        
        Jul 27, 2017
        
        
        Sep 23, 2014‡
        Mar 23, 2017
     

     

        CBL18   
        Mar 26,2020
        Jan 13, 2017
        
        Sep 7, 2017
        
        
        Feb 5, 2015‡
        Jan 27, 2018
     

     

        CBL19   
        Mar 25, 2020
        Jan 10, 2018
        
        Jan 24, 2018
        
        
        Mar 23, 2015
        Mar 12, 2018
     

     

        CBL20   
        Mar 25, 2020
        Jan 22, 2018
        
        Apr 26, 2018
        
        
        Mar 23, 2015
        Jun 6, 2018
     

     

        CBL21   
        Apr 7, 2020
        Mar 28, 2018
        
        Jun 28, 2018
        
        
        June 17, 2015
        Jun 7, 2018
     

     

        CBL22   
        Apr 20, 2020
        Oct 22, 2018
        
        Jul 9, 2019
        
        
        July 21, 2015
        Jun 28, 2018
     

     

        CBL23   
        Apr 17, 2020
        Nov 19, 2018
Reopen
Dec 13, 2018
Reopen
Apr 3, 2020		
        
        Aug 1, 2019
        
        
        July 20, 2015
        Oct 22, 2018
     

     

        CBL24   
        
        Jan 11, 2019
        
        Oct 28, 2019
Reopen
Mar 24, 2020		
        
        
        July 23, 2015‡
        Apr 10, 2019
     

     

        CBL25   
        
        Jan 14, 2020
        
        Mar 27, 2020
Reopen
May 4, 2020		
        
        
        Sep 16, 2015
        Jun 24, 2019
     

     

        CBL26   
        
        Mar 18, 2020
        
        Apr 9, 2020
        
        
        Oct 6, 2015‡
        Jul 15, 2019
     

     

        CBL27   
        
        Apr 3, 2020
        
        Mar 30, 2020
        
        
        Dec 2, 2015
Reopen
Jan 22, 2016		
        Jul 15, 2019
     

    

        CBL28   
        
        Mar 22, 2020
Reopen
Apr 2,2020		
        
        Apr 2, 2020
        
        
        Jan 14, 2016
        Jul 17, 2019
     

    

        CBL29   
        
        Mar 22, 2020
Reopen
Apr 2, 2020		
        
        Apr 24, 2020
        
        
        Feb 25, 2016
        Mar 26, 2020
     

    

        CBL30   
        
        Mar 31, 2020
        
        Apr 14, 2020
Reopen
Apr 30, 2020		
        
        
        Mar 11, 2016
        Mar 23, 2020
     


    

        CBL31   
        
        Apr 22, 2020
        
        Apr 22, 2020
        
        
        Mar 22, 2016‡
        Mar 23, 2020
     

    

        CBL32   
        
        May 22, 2020
        
        
        
        
        Apr 26, 2016
        Apr 3, 2020
     

     

        CBL33   
        
        
        
        
        
        
        Sep 14, 2016
        Apr 3, 2020
     

     

        CBL34   
        
        
        
        
        
        
        Jan 11, 2017
        
     

     

        CBL35   
        
        
        
        
        
        
        Dec 8, 2017
        
     

     

        CBL36   
        
        
        
        
        
        
        Jun 8, 2018
        
     

     

        CBL37   
        
        
        
        
        
        
        Jun 28, 2018
        
     

     

        CBL38   
        
        
        
        
        
        
        Sep 10, 2018
        
     

     

        CBL39   
        
        
        
        
        
        
        Oct 22, 2018
        
     

     

        CBL40   
        
        
        
        
        
        
        Jan 29, 2019
        
     

     

        CBL41   
        
        
        
        
        
        
        Mar 14, 2019
        
     

     

        CBL42   
        
        
        
        
        
        
        Jun 19, 2019
        
     

     

        CBL43   
        
        
        
        
        
        
        Jun 27, 2019
        
     

     

        CBL44   
        
        
        
        
        
        
        Sep 23, 2019
        
     

     

        CBL45   
        
        
        
        
        
        
        Oct 3, 2019
        
     

     

        CBL46   
        
        
        
        
        
        
        Dec 30, 2019
        
     

     

        CBL47   
        
        
        
        
        
        
        Jan 21, 2020
        
     

     

        CBL48   
        
        
        
        
        
        
        Jan 24, 2020
        
     

     

        CBL49   
        
        
        
        
        
        
        Jan 30, 2020
        
     

     

        CBL50   
        
        
        
        
        
        
        Mar 24, 2020
        
     

     

        CBL51   
        
        
        
        
        
        
        Mar 20,2020
        
     

     

        CBL52   
        
        
        
        
        
        
        Apr 6, 2020
        
     

     

        CBL53   
        
        
        
        
        
        
        Mar 27,2020
        
     

     

        CBL54   
        
        
        
        
        
        
        Mar 27,2020
        
     

     

        CBL55   
        
        
        
        
        
        
        Mar 27,2020
        
     

     

        CBL56   
        
        
        
        
        
        
        Mar 27,2020
        
     

     

        CBL57   
        
        
        
        
        
        
        Apr 24, 2020
        
     

     

        CBL58   
        
        
        
        
        
        
        Jun 1, 2020
        
     

     

        CBL59   
        
        
        
        
        
        
        Jun 1, 2020
        
     

     

        CBL60   
        
        
        
        
        
        
        Jan 27, 2021
        
     

   





† RBC uses CBxx instead of CBLxx to designate its series.
* RBC series CB1 - CB9 were issued under its program prior to enactment of the Canadian legislation for covered bonds.
‡ SEC registered offerings.
  
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Updated: 2/18/2024





Canadian Covered Bond Documents


Each Canadian issuer provides a copy of all program agreements and documents on its website.  A copy of each prospectus, offering materials for each offering, the various agreements that are part of the covered bond program, and copies of the monthly investor reports are available.



    

        
       BMO
       BNS
       CIBC
       EQB
       FCDQ
       HSBC
       LBC
       NBC
       RBC
       TD
    


     

        Web Site
        BMO Web Site
        BNS Web Site
        CIBC Web Site
        EQB Web Site
        FCDQ Web Site
        HSBC Web Site
        LBC Web Site        
        NBC Web Site
        RBC Web Site
        TD Web Site
        


     

         CB Documents
         BMO Docs
         BNS Docs
         CIBC Docs
         EQB Docs
         FCDQ Docs
        HSBC Docs
        LBC Docs          
        NBC Docs
         RBC Docs
         TD Docs
         


     

        EU Prospectus

            
    2023 UKLA

        
    2023 UKLA

        
    2023 CSSF

        
    2023 ISE

        
    2023 ISE

        
    2022 UKLA

        
    2021 CDN 

        
    2023 UKLA

        
    2023 UKLA

        
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                    [post_title] => Sitemap
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                    [post_title] => USD Issuance
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Why do investors like covered bonds?

What is it about covered bonds that investors like?  Even U.S. investors who have plenty of other fixed income investment opportunities.  In Europe there is more than €2 trillion in covered bonds outstanding.  Even in the U.S., which has no statute to enable its banks to issue covered bonds, there is $150 billion of covered bonds outstanding.

 What is it about these bonds and who is buying them?

You can find out who the investors are at The Cover or The Covered Bond Report.  Both publications provide a breakdown of type and location of investors by offering.  And what the data shows is that banks and central banks are between 50% and 80% of the investors, depending on the offering.  The remainder goes to funds, asset managers and insurance companies.  While not a distinct class of investors, the composition is quite different from the class of investors in bank senior debt or securitizations. Why?  And why central banks?  Aside from QE, of course.  

The answer lies in the nature of covered bonds.  Covered bonds are a different kind of investment.  They are more than senior bank debt because there is recourse to the cover pool.  They are more than securitization because there is recourse to the issuing bank.  Covered bonds are a dual recourse instrument, which raises an investor's confidence in their safety.  Importantly, in Europe covered bonds are not subject to bail-in, while senior debt is.

And in Europe, covered bonds receive favorable capital treatment under the bank capital rules, attracting only half the capital that a senior bond from the same institution would attract.  But that only makes sense given the dual recourse nature of covered bonds compared to senior debt.  And of course central banks are not subject to the capital rules anyway.

So what appears to attract banks and central banks and other investors is the high level of safety with covered bonds combined with a yield that exceeds similarly rated sovereign debt.  And covered bonds have a similar risk profile - no defaults in 250 years.  Quite a record.

There are other details about covered bonds that are also considered important.  

Covered bonds are issued by regulated financial institutions and the covered bond programs of the institutions are separately regulated.

The quality of the assets in a cover pool is high and subject to regulation.  Any assets that default or become delinquent must be replaced on a monthly basis.  The bank has 100% "skin-in-the-game."  

The bonds are simple, bullet pay instruments with either a fixed or floating rate.  If the issuing bank were to become insolvent, the assets in the cover pool are intended to continue payments on the bonds through their maturity.  No pre-payment risk.

Each series of covered bonds is a single class, so there is no complex class structure and complex payment waterfall to analyze.  The credit analysis is primarily an analysis of the strength of the issuing bank and for this there is a huge community of analysts to assist an investor and a wealth of analytical experience covering more than 100 years of corporate credit analysis.  The lack of experience and analytical talent was one of the prime failings of securitizations leading up to the crisis.

So what's not to like?  A risk profile like sovereign bonds and a better yield. No wonder there is a €2 trillion market. But will the United States Congress like them?




                    [post_title] => Why do investors like covered bonds?
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Why not covered bonds?



Why not pass legislation for covered bonds in the United States? It is easy to do and there is basically no cost to the Treasury. In 2011, covered bond legislation passed the House Financial Services Committee by a vote of 44 to 7, a very strong bi-partisan vote. The only dissenters were hoping to implement provisions requested by the FDIC that were rejected by the majority. The dissenters were unable to retain even members from their own party on the final vote. Probably more than any other development, this demonstrates that covered bonds are not a partisan concept, they are not divisive and they have broad support.



Covered bonds will bring private funding to residential mortgage loans, but there is no good reason that passage of covered bond legislation should be tied to GSE reform. There is nothing about covered bonds that would implicate GSE reform, except that by bringing private funding to the market they could reduce the dominate role of the GSEs. And there is no credible evidence that either party in Congress believes that a continued dominate role for the GSEs is a policy mandate.



An unlike securitization of residential mortgage loans, no concerted effort is needed to get investors to participate. Investors are wary of residential mortgage securitization as a result of the financial crisis, which was precipitated by mortgage securitization. There are many efforts underway to convince investors to return to the RMBS market. Covered bonds carry no such baggage. Covered bonds have been readily sold to U.S. markets since 2010 and investors remain eager for more.



Covered bonds are more transparent to regulators.



Covered bonds are a simpler investment analysis for investors.



Covered bonds are proven financing technology with worldwide acceptance.



Covered bonds are friendlier to mortgage borrowers because the originator retains the right to modify loans to assist borrowers in working out difficult loans.



What’s to lose? Maybe covered bonds could develop into a vibrant private sector funding alternative for residential mortgage loans. If not, no loss. And no cost. But if it works, it’s a plus all around.





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Updated: 2/06/2018



USD Covered Bond Issuers





     Issuer
     Issuer URL




          Aareal Bank
          https://www.aareal-bank.com/en/nc/investors-portal/debt-investors/debt-issuance-programme/final-terms/




      Australia & New Zealand Banking Group 
      http://debtinvestors.anz.com/covered-bonds/covered-bond-programmes 




      Bank of Montreal 
      http://www.bmo.com/home/about/banking/investor-relations/covered-bonds 




      Barclays Bank PLC 
     
 http://www.barclays.com/prospectuses-and-documentation/secured-funding-documentation/covered-bonds.html 





      Bank of Nova Scotia 
     
 http://www.scotiabank.com/ca/en/0,,3798,00.html




      Bayerische Landesbank 
     
 http://www.bayernlb.com/internet/en/content/metanav/investor_relations/emis_3/dip_1/dip.jsp 




      BNP Paribas Home Loan 
     
 https://invest.bnpparibas.com/en/debts/bnp-paribas-home-loan-sfh/benchmark-issues-home-loan-sfh




      Caisse centrale Desjardins du Quebec 
     
 http://www.desjardins.com/ca/about-us/investor-relations/fixed-income-investors/ccd-covered-bonds/index.jsp




      Canadian Imperial Bank of Commerce 
     
 https://www.cibc.com/ca/investor-relations/debt-info/legislative-covered-bond-program.html




      Cie Financement Foncier 
     
 http://www.foncier.fr/disclaimer.html




      Credit Agricole Home Loans 
     
http://www.credit-agricole.com/en/Investor-and-shareholder/Debt/Wholesale-Bond-Issues/CA-Home-Loan-SFH-Covered-Bonds




      Credit Mutuel 
     
https://www.creditmutuel.com/groupe/fr/index.html




      Credit Suisse Guernsey 
     
 http://www.guernseyfinance.com/business-directory/credit-suisse-(channel-islands)-limited/ 




      Commonwealth Bank of Australia 
     
 https://www.commbank.com.au/about-us/group-funding/covered-bonds.html 




     DBS Bank Ltd
     http://www.dbs.com/investor/covered-bonds.html




     Deutsche Pfandbriefbank AG
     https://www.pfandbriefbank.com/en/investors/debt-investors/




      DnB Boligkreditt 
     
 https://www.dnb.no/en/about-us/investor-relations/funding.html




      DnB NOR Boligkreditt 
     
 https://www.dnb.no/en/about-us/investor-relations/funding.html




      Helaba 
     
 https://www.helaba.de/com/helaba/investor-relations/funding/covered-bonds




      HSBC Bank PLC 
     
 http://www.hsbc.com/investor-relations/fixed-income-securities/issuance-programmes




      HSBC Canada Bank
     
 https://www.about.hsbc.ca/hsbc-in-canada/legislative-covered-bond-programme




      HypoVereinsbank AG
     
 https://www.hypovereinsbank.de/hvb/ueber-uns/investor-relations/emissionen-deckungsstock/emissionen




      ING Bank NV 
     
 http://www.ing.com/Investor-relations/Fixed-income-information/ING-Debt-securities/Debt-securities-ING-Bank-N.V..htm




      Kookmin Bank 
     
 https://omoney.kbstar.com/quics?page=C036387




      Korea Housing Finance Co 
     
 http://www.sgx.com/wps/portal/sgxweb/home/company_disclosure/prospectus_circulars




      LBBW 
     
 http://www.lbbw.de/en/investor_relations/investor_relations_start/investor_relations.jsp




      Lloyds Bank plc 
     
 https://www.lloydsbankinggroup.com/investors/fixed-income-investors/covered-bonds/




      Muenchener Hypothekenbank eG 
     
 https://www.muenchenerhyp.de/en/investors/issues/pfandbriefe/index.html
https://www.bourse.lu/search?S=munchener		




      National Australia Bank 
     
 http://capital.nab.com.au/




      National Bank of Canada 
     
 https://www.nbc.ca/en/about-us/investors/investor-relations/capital-debt-information.html




      Nationwide Building Society 
     
 https://www.nationwide.co.uk/about/investor-relations/funding-programmes/covered-bond




      Nord/LB 
     
 https://www.nordlb.com/nordlb/investor-relations/




      Nord/LB CBB
     
 https://www.nordlb.lu/online/www/menu_top/invrel/35/ENG/index.html




      Nordea Eiendomskreditt AS 
     
 http://www.nordea.com/Investor%2BRelations/Financial%2Breports/Local%2Breports/Nordea%2BEiendomskreditt%2BAS/1412572.html




      Royal Bank of Canada 
     
 http://www.rbc.com/investorrelations/covered-bonds-terms.html




      Santander UK 
     
 https://www.santander.co.uk/about-santander/investor-relations/santander-uk-covered-bonds






      SEB 
     
 http://sebgroup.com/investor-relations/debt-investors/covered-bonds




      Sparebanken 1 Boligkreditt 
     
 https://spabol.sparebank1.no/bonds#usd




      SR Boligkreditt 
     
 https://www.sparebank1.no/en/sr-bank/about-us/investor/financial-info/sr-boligkreditt.html




      Stadshypotek AB 
     
 http://www.stadshypotek.se/




Sumitomo Mitsui Banking Corporation
https://www.smfg.co.jp/english/investor/debt/covered_bond.html




      Swedbank HypotekAB 
     
 https://www.swedbank.com/investor-relations/debt-investor/funding/covered-bonds/index.htm




      Toronto-Dominion Bank 
     
 http://www.td.com/investor-relations/ir-homepage/debt-information/legislative-covered-bonds/LCBTermsofAccess.jsp




      UBS AG London 
     
 http://www.ubs.com/global/en/about_ubs/investor_relations/debt/covered_bonds.html




      United Overseas Bank 
     
 https://www.uobgroup.com/investor-relations/capital-and-funding-information/Disclaimer_C.html
https://www.coveredbondlabel.com/issuer/123/		




      Westpac Banking Corp 
     
 http://www.westpac.com.au/about-westpac/investor-centre/fixed-income-investors/wbc-covered-bonds-user-agreement/





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                    [post_title] => Site Archives
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Concerns about Covered Bonds




Updated: 01/21/2015





Discussed below are current issues and concerns that have been raised in connection with proposed U.S. covered bond legislation.  Also set out are responses to the issues and concerns, which do not purport to represent all views or be complete.  Comments and other views are welcome.




    
	
  • Cannibalizing Securitization.  Some commentators have raised the concern that if legislation for covered bonds were adopted in the U.S. it could cannibalize securitization, particularly mortgage securitization.  The comment was raised in a post-crisis environment in which no private sector mortgage securitization was occurring.  Even today, more than six years after the crisis, there is little private sector securitization of residential mortgage loans.
    • 




 
Response.  Investors in covered bonds generally do not purchase RMBS or other ABS.  Covered bond investors tend to purchase sovereign debt and agency debt and find covered bonds to present similar risks.  They are attracted by the dual recourse nature of covered bonds, the statutory framework for issuance and issuance by regulated financial institutions.  Covered bonds present no convexity risk, no complex class structures and generally are protected by high quality collateral.  At a conference in Barcelona before the crisis, HSBC, which was a heavy user of both RMBS and covered bonds, stated that the bank viewed RMBS and covered bonds as alternative means of financing, the choice of which for any particular financing was determined by a variety of market and regulatory factors. There is every reason to expect that RMBS and covered bonds would co-exist in the U.S. market also as viable alternative means of financing.

 

    
	
  • Cost to the Treasury.  The Congressional Budget Office has released an assessment of the reduced tax revenue to the U.S. Treasury under H.R.940 as a result of banks using covered bonds rather than RMBS to finance mortgage loans.  This loss is estimated to be about $500 million over ten years. The Joint Committee on Taxation sent a revenue estimate to the House Financial Services Committee.  David Camp, Chairman of the House Ways and Means Committee, sent a letter  transmitting the JCT revenue estimate and enclosing an amendment to H.R.940.   
    • 





Response.  One can quarrel with many of the CBO assumptions in this analysis, but perhaps the most misleading aspect of the conclusions is the failure to acknowledge that, as a result of a change by the FDIC in calculating the assessment for each bank to support the DIF from being based on deposits to being based on all liabilities of a bank, issuing covered bonds instead of securitizing will result in the FDIC collecting higher assessment fees. Moreover, the CBO does not appear to assume any value for the residual interest the FDIC would hold in a cover pool.  This residual is intended to provide the FDIC with access to the excess value in the cover pool above what is required to repay the covered bonds. 


 


The amendments proposed by the Ways and Means Committee do not appear to do any harm to H.R.940 as a covered bond statute.

 

    
	
  • Encumbrance of Assets.  Among the concerns on covered bonds raised by the Federal Deposit Insurance Corporation is a concern that cover pools for covered bonds will tend to consume the better assets of a bank, leaving the FDIC with poorer quality assets to satisfy the claims of depositors and increasing the risk to the deposit insurance fund.  The FDIC has also expressed a concern that over-collateralization levels can become larger as a bank's credit position deteriorates.  They point to the nearly 50% over-collateralization in the Washington Mutual covered bond program shortly before the FDIC took over the bank.  The FDIC also points to high over-collateralization in some European covered bond programs.
    • 





Response.  First, the higher levels of over-collateralization seen in some European covered bond programs are perhaps a misconception.  These levels generally  are due to structural aspects of the mortgage business in some jurisdictions which result in a bank's entire portfolio being available to repay covered bonds.  Second, many other forms of bank financing encumber assets, including central bank financing, repo financing, securitization, FHLB borrowings and various types of collateralized derivatives.  To focus only on covered bonds tends as a policy matter to encourage the other forms of financing over covered bonds, which does not seem to be a wise policy choice.  See a more complete analysis at A Battle over Collateral.




In the case of the Washington Mutual program, the high over-collateralization level arose from the peculiar structure used for that program.  Under the terms of the program, in the event of the insolvency of the issuer the entire mortgage pool was to be liquidated and the proceeds were to be placed in a guaranteed investment contract.  The proposed legislation would not conduct a fire sale of the entire cover pool at insolvency.  Instead the assets in the cover pool would be retained in a separate estate and administered to pay the bonds in accordance with their terms.




The former general counsel of the FDIC has reported that prior to his departure the agency had agreed internally that the risk from encumbrance would be ameliorated by an 8% cap on issuance of bonds.  This would certainly be an acceptable starting place for U.S. banks issuing covered bonds if it could be agreed to.

 

    
	
  • Loss of Repudiation Power.  The FDIC has complained that under the proposed legislation it would lose its traditional power to repudiate the obligations of a bank in resolving the receivership of a failed bank in the case of covered bonds.  Instead, the cover pool would be separated from the failed institution and administered to continue making payments on the bonds.
    • 





Response.  The FDIC has already lost its repudiation power in connection with several other means of financing bank assets: repurchase agreements, FHLB borrowings, central bank financings, securitizations and collateralized derivatives.

 

    
	
  •  Only the Largest Banks Benefit.  One of the criticisms of covered bonds is that they would only benefit large, money center banks.
    • 





Response.  The potential benefit to smaller and regional banks seems to be largely overlooked.  Covered bonds would permit financing of commercial mortgage loans and loans to municipalities, assets for which smaller and regional banks do not currently have capital markets access.


 


Moreover, the European jurisdiction with the most similar banking system in terms of number of banks is Germany.  Germany has more that 2200 banks.  It is the smaller banks in Germany that provide the bulk of the residential mortgage financing and they fund that activity in the covered bond market.  Germany has a two-tier covered bond market: a domestic market (or private market) and an international market.  The smaller banks finance in the domestic covered bond market, which does not attract international investors but which nevertheless continued to provide funds throughout the financial crisis.  The purchasers in the market tend to be other local banks, local insurance companies, smaller retirement funds and other local investors who are able to focus on regional institutions.  There is good reason to think that a similar market would develop in the U.S.

 

    
	
  • Adversely Affect the FHLBs.  Several of the Federal Home Loan Banks have raised the concern that covered bonds could damage the FHLB system by reducing usage of FHLB borrowings and that as a result the FHLBs might not be able to provide important support and liquidity during the next financial crisis.
    • 





Response.  This argument seems to ignore the effect on the FHLBs of securitizations and the support provided by Fannie Mae and Freddie Mac for mortgage loans.  Although some institutions relied heavily on FHLB borrowings to finance their mortgage lending prior to the financial crisis, there was extensive use of securitization and the GSEs; nevertheless, the FHLBs moved rapidly to inject massive liquidity into the banking system as the crisis developed.  While it is possible that reliance on covered bonds could reduce borrowings from the FHLBs, it is also possible that instead the reduction would, at least in part, be a reduction in RMBS issuance or GSE financings.  Moreover, there is nothing to suggest that heavy reliance on the FHLBs prior to a crisis is an essential predicate to the ability of the FHLBs to provide important liquidity as a crisis develops.

 

    
	
  • Best assets are taken away. Sometimes regulators are heard to complain that banks will use their best assets for covered bonds thus leaving the regulator, in the case of a failure of the issuing bank, with lower quality assets to meet the claims of depositors. 

    • 




 
Response.  
 There are several responses to this concern. First, there is a certain level of risk in financing long term assets like mortgage loans with short term deposits and therefore some benefit to financing mortgage loans with longer term liabilities. Second, the same complaint could be made, but never seems to be, about securitization - the bank will securitize its best assets and leave the regulator with lower quality assets. Third, the complaint says something about the regulatory environment that lets a bank originate lower quality assets. Mortgage loans cannot be the only quality assets a bank can originate. And fourth, the complaint probably reflects a concern more with the size of the covered bond program relative to the bank's mortgage portfolio and therefore might be addressed with limits on issuance appropriate for the balance of different business lines of the bank. 

 

    
	
  • Refinance risk. 
Sometimes a concern is heard that covered bonds expose a bank to refinance risk when the covered bonds mature. Unlike a securitization, a bank continues to own the mortgage loans that are part of the cover pool. Thus when a series of covered bonds mature, the bank needs to find a new source of financing to pay off the maturing bonds and provide continued financing for the mortgage loan assets it holds. Most often this will be a new series of covered bonds, but there are also many other sources of funds available to a bank.

    • 




 
Response.  
 This risk is reduced if covered bond maturities more closely match the maturities of the mortgage loans. But this response ignores the fact that the bank is continuously originating new mortgage loans and the mortgage portfolio is not in run-off mode. The answer to the concern really is that banks are always faced with refinance risk as funding matures - this is not unique to covered bonds. If a bank is unable to securitize it will face similar problems as loans pooled for a securitization are usually financed temporarily by short term warehouse lines of credit that require loans to be withdrawn after a period of time. Similar risks arise whether a banks finances with deposits or term funding of any nature. If deposits are withdrawn or funding is not renewed, there will be a need for emergency funding typically provided through central banks. 

 

    
	
  • Continued origination required. 
By design, covered bonds are not pass-through securities. As assets amortize or mature, funds received are used to purchase more loans to maintain the required asset coverage ratio of the cover pool. This requires the continued origination of new mortgage loans. Thus there is risk that if the bank is unable to originate mortgage loans in sufficient volume the cover pool may breach the asset coverage test, resulting in an event of default for the covered bonds. 

    • 




 
Response.  
This is a risk that does not exist with securitization, but only exists with on-balance sheet funding. The concern is addressed in part with a limit on the portion of the mortgage loan portfolio that can be used for covered bonds. But the larger concern is that if a bank is unable to originate new assets, it will need to begin shrinking its liabilities. After all, assets and liabilities need to match (accounting for equity of course). An over reliance on long term funding increases a bank's exposure to this risk, so it is properly addressed through managing the balance of funding maturities. 

 

    
	
  • Covered bonds do not provide capital relief. 
True. The mortgage loans will continue to be carried on the balance sheet of the bank since they are owned by the guarantor, which is a subsidiary of the bank and consolidated on the bank's balance sheet. But few options exist for obtaining capital relief short of the outright sale of the mortgage loans. 

    • 




 
Response.  
With the changing regulatory and accounting requirements, it is increasingly difficult for a bank to obtain capital relief through securitization, particularly when investors look for the securitizer to have a real continued interest in the performance of the assets. This requires a bank to keep a significant retained interest in the mortgage loans, complicating achieving capital relief. Funding mortgage loans through deposits or senior debt will not provide capital relief either. If there is a desire for capital relief, there will be a tendency to keep the best assets and sell or securitize the riskier assets as that probably will achieve the most capital relief. In that sense it is likely that the best assets will be used for covered bonds as some regulators complain. 

 



                    [post_title] => Concerns about Covered Bonds
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                    [post_date] => 2014-10-08 14:26:39
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Updated: 12/28/2015






The United States Securities and Exchange Commission (the “SEC”) adopted revisions to Regulation AB on August 27, 2014, after a four year process of proposals and review.  Regulation AB is the rule that governs the offering disclosure and periodic reporting obligations of issuers of asset-backed securities (“ABS”).  



Insofar as covered bonds are concerned, several things are clear.  First, covered bonds are not included  in the definition of “asset-backed security.”  Item 1101 of Regulation AB provides that:


                 
Asset-backed security means a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the security holders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cash proceeds from the disposition of the physical property underlying such leases.  

                          


It is clear that covered bonds are not “primarily serviced by the cash flows of a discrete pool of receivables or other financial assets.”  Instead, covered bonds are senior obligations of the issuing financial institution and are expected to be repaid from the general funds of the institution.  Accordingly, covered bonds should not be asset-backed securities and Regulation AB should not apply generally to covered bonds.



Second, although the Commission had proposed extending the disclosure requirements of Form SF-1 and Regulation AB to privately placed ABS, the Commission did not adopt the proposed change.  The Commission stated, however, that the proposal remained outstanding.



Thus, for most issuers of covered bonds, Regulation AB II will not be applicable. Most covered bonds issued in the U.S. are issued under Rule 144A as private placements, to which Regulation AB does not currently apply.  Moreover, even if the SEC were to extend Regulation AB to private placements, since covered bonds are not asset-backed securities, Regulation AB would still not apply to Rule 144A offerings of covered bonds.



For the Canadian issuers with SEC registered covered bond programs, however, there still remains the question of whether they will be required to make loan-level disclosure for the mortgage loans in their cover pools in accordance with the requirements of Regulation AB.  Each of the Canadian issuers requested a no-action letter from the SEC staff to enable it to register its covered bond program.  (See, e.g., the RBC no-action letter.)  Each issuer stated in its letter that it would provide offering disclosure and periodic reporting in connection with its covered bond offerings consistent with the requirements of Items 1111 and 1121 of Regulation AB.  These two provisions of Regulation AB have now been revised by the SEC’s amendment of Regulation AB to require disclosure of 270 data fields for each residential mortgage loan.  Whether the SEC staff will extend the new loan-level disclosure requirements of revised Items 1111 and 1121 to these Canadian covered bond issuers is a question.  



If the SEC decides to require the Canadian banks to disclose loan-level information for each residential mortgage loan in their cover pools in accordance with Items 1111 and 1121 of Regulation AB, this could prove troublesome.  These provisions require the disclosure of information that raised concerns under U.S. consumer privacy laws.  In the end, the SEC needed to obtain a letter from the Consumer Finance Protection Bureau stating that the disclosure of information as required by the SEC under Regulation AB would not result in a violation of consumer financial privacy laws.  However, this protection for issuers is only protection from violation of U.S. laws.  Non-U.S. issuers do not benefit from this protection if they disclose information about consumers in the issuers' home jurisdictions.   



Additionally, because residential mortgage loan products are different in Canada, many of the requested fields are simply inapplicable.  And the extensive disclosure required under the SEC's template would require the collection of information that Canadian banks do not currently collect in their residential mortgage business and retain in their computer systems.  Modifying existing computer systems and business processes to collect and retain this information could be expensive and disruptive.  



The bottom line may be that compliance with Regulation AB by foreign financial institutions is impractical.  This would mean that the registered ABS market in the U.S. would be reserved for securitization of U.S. assets only.  



Stay tuned.






                    [post_title] => Reg AB II and Covered Bonds
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In the United States there is a lot of discussion about how to reduce the taxpayers' exposure to housing finance. The conservatorships of Fannie Mae and Freddie Mac were a pointed reminder of the extent of the government's, and the taxpayers', role in housing finance. Additionally, after being taken into conservatorship, the GSEs were intentionally used to prevent a feared collapse of the housing market, further expanding their role.



As a result, the GSEs, together with FHA and GNMA, at one point provided more than 95% of the financing for new residential mortgage loans, and today they still finance roughly nine out of every ten new mortgage loans.  At the same time, the private label securities (PLS) market, which provided significant private funding for residential mortgage loans, essentially vanished.  The issuance of new PLS declined nearly 99% in the years following the crisis.



Today there is general agreement across the political spectrum that it would be desirable to restore some level of private funding for residential mortgage loans and reduce the role of the GSEs.  There are also plans to reform the GSEs and refine their mission in housing finance.  There is less agreement on the reform proposals.



On June 27, 2014, Treasury Secretary Jacob Lew requested comment on what steps could be take to restore a functioning PLS market.  Almost uniformly the commenters voiced the need to shrink the presence of Fannie and Freddie in the market in order to make room for a PLS market.  This reflected the view that under the existing authority of the GSEs, the private market would not be price competitive and would only be able to finance a small number of loans that did not qualify for financing through the GSEs under their very high loan limits.



However, the presence of the GSEs is not the only factor impeding the development of the PLS market.  The regulatory landscape for securitizing mortgage loans has been altered dramatically since the crisis.  Basel III imposes heavy, in some cases almost punitive, increased capital requirements on banks and most particularly for securitization exposures held by banks.  The risk weighting for securitization exposures can range up to 1250% and in some cases, such as non-cash gain on sale, the capital requirements will result in a deduction from Tier 1 equity capital.  Rulemaking by the Consumer Financial Protection Board exposes any holder of a mortgage loans to severe penalties for those loans not underwritten in accordance with the CFPB underwriting criteria, which are designed to protect the borrower.  SEC requirements for mortgage securitization require 270 data points of information to be disclosed for every mortgage loan in a securitization, both at the time of the offering and in periodic reporting for the life of the securitization.  Then there is risk retention, prohibited conflicts of interest, margin requirements for swaps, the Volcker Rule, conflicting requirements in foreign securities markets and a litany of other burdens on the PLS market.




So while shrinking the GSEs may be viewed as a necessary condition to restarting the PLS market, there is no consensus that shrinking the GSEs will by itself restore the PLS market.  And there has to be some hesitation in shrinking the GSEs, if there is no confidence that the PLS market, or some form of private funding, will be there.  So we have a chicken and  egg problem.  There is, of course, a bit of a safety valve in that banks can hold mortgage loans on balance sheet and fund them through deposits or senior debt.  But that is not viewed as other than a temporary solution.



This situation requires then that any shrinking of the GSEs be done slowly and limited to the extent that private funding alternatives develop.  Else you run the risk of severely limiting funding in the housing market.  But this approach raises the question of whether the private sector will bother making the necessary investments to issue PLS if the market is going to be so small for quite some time.



It would seem that covered bonds could provide a solution to this problem.  Covered bonds provide private sector funding for mortgage loans held on balance sheet at very efficient rates compared to senior debt.  And covered bonds provide term funding and a much improved asset-liability mismatch compared to deposit funding. Thus the use of covered bonds could expand the utility of the safety valve, allowing the GSEs to shrink quicker.



Do covered bonds displace the PLS market?  The answer is no, but it is a qualified no. Enabling domestic banks to issue covered bonds may induce some greater retention of mortgage loans as a result of the financing efficiency of covered bonds over senior debt.  Securitization transfers the risk of mortgage loans to investors, getting the loans off-balance sheet, and investors are repaid solely from cash flows on the mortgage loans.  Covered bonds, on the other hand, provide funding for loans that are hold on-balance sheet; the bonds are senior obligations of the issuing bank.  Thus the two financing techniques are not directly competitive.  And enabling domestic banks to issue covered bonds would allow the GSEs to shrink faster and enhance the likelihood of restoring a PLS market.



The covered bond market has been developing nicely in the United States through sales of covered bonds issued by foreign banks to U.S. investors.  There are now about $150 billion of U.S. dollar denominated covered bonds outstanding. There is also well-developed draft legislation that has attracted strong bi-partisan support in Congress.  It is legislation that could be enacted quickly if the administration were to push for it.



An idea worth considering.






                    [post_title] => Use CBs to Restart the PLS Market
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On Wednesday, August 27, 2014, the United States Securities and Exchange Commission finalized the changes to Regulation AB (commonly referred to as Reg AB II).  The Commission issued a press release and a draft adopting release adopting the changes.  The final version of the adopting release will be published in the Federal Register after review by the Office of Management and Budget (OMB). Regulation AB II and the related changes regulate the offering process and the disclosure and reporting requirements for asset-backed securities.  Perhaps the most significant changes are (i) a requirement to file a preliminary prospectus at least three days prior to the sale of any securities and (ii) disclosure of loan-level information in machine readable form for ABS backed by residential mortgage loans, commercial mortgage loans, auto loans, auto leases, and debt securities (including resecuritizations).  Updated loan-level data also must be filed periodically after issuance of the securities.  The loan-level disclosure requirements come into force not later than two years after the effective date of the changes, which will be the date of the publication of the changes in the Federal Register.  


The effect on covered bond issuers of these changes is still being analyzed and will be covered by a later post.  However, it is clear that these changes would not be directly applicable to Rule 144A offerings of covered bonds. 


See the MoFo Client Alert.





                    [post_title] => SEC Finalizes Reg AB II
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The SEC announced today that it would hold a public meeting to consider amendments to Regulation AB on Wednesday, August 27:






SECURITIES AND EXCHANGE COMMISSION 

Sunshine Act Meeting. 

Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Pub. L. 94-409, that the Securities and Exchange Commission will hold an Open Meeting on Wednesday, August 27, 2014 at 10:00 a.m., in the Auditorium, Room L-002.


The subject matters of the Open Meeting will be:


    
   
  • The Commission will consider whether to adopt rules revising the disclosure, reporting and offering process for asset-backed securities.  The revisions would require asset-backed issuers to provide enhanced disclosures, including information for certain asset classes about each asset in the underlying pool in a standardized, tagged format, and revise the shelf offering process and eligibility criteria for asset-backed securities.
    • 

   
  • The Commission will consider whether to adopt rule amendments and new rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning nationally recognized statistical rating organizations, providers of third-party due diligence services for asset-backed securities, and issuers and underwriters of asset-backed securities under the Securities Exchange Act of 1934.
    • 





The duty officer has determined that no earlier notice was practicable.


At times, changes in Commission priorities require alterations in the scheduling of meeting items.


For further information and to ascertain what, if any, matters have been added, deleted, or postponed, please contact:


The Office of the Secretary at (202) 551-5400.


Kevin M. O'Neill

Deputy Secretary


Dated: August 22, 2014




http://www.sec.gov/news/openmeetings/2014/ssamtg082714.htm








Although the SEC's proposal to amend Regulation AB (hence Reg AB II) is primarily concerned with asset-backed securities, the Commission's action will be of interest to covered bonds issuers for two reasons:


    
   
  • whether covered bonds will be defined as asset-backed securities and therefore expressly subject to Reg AB II;

    • 
   
  • whether Reg AB II requirements will be extended to asset-backed securities sold under Rule 144A.
    • 



Covered bonds do not fall within the current definition of asset-backed security, as the SEC has recognized in several no-action letter issued to Canadian banks.  Nevertheless, in those no-action letters, the SEC has required the banks to comply with specific provisions of current Regulation AB as a condition of registering covered bonds with the SEC. If those provisions are amended, the banks could be required to comply with the provisions as amended.  


However, if covered bonds are defined as asset-backed securities under Reg AB II, there may be other provisions that they would be required to comply with, including possibly the proposed requirement to issue a preliminary prospectus at least five days prior to the sale of any security.  


Until now, Regulation AB has applied only to asset-backed securities registered with the SEC, and 144A covered bonds have not been subject to the regulation.  The extension of Reg AB II to asset-backed securities offered under Rule 144A would therefore affect Rule 144A covered bonds if covered bonds were defined to be asset-backed securities.  The extension of Reg AB II to privately placed securities sold under Rule 144A would be a major departure from prior practice.  If Reg AB II is not extended to 144A securities, covered bonds could still be offered in the United States under Rule 144A without complying with Reg AB II, even if covered bonds were defined as asset-backed securities under Reg AB II.


Accordingly, the outcome of the meeting on Wednesday will be of considerable interest to covered bond issuers who currently offer or plan to offer covered bonds in the United States.





                    [post_title] => SEC Calls Reg AB II Meeting
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BNS initially filed its registration statement for its legislative covered bond program on Form F-3 with the SEC on May 31, 2013.  That registration was declared effective on September 9, 2013. However, BNS did not file a prospectus under the registration statement with the SEC until today, August 20, 2014.  In the interim, BNS filed a prospectus with the UKLA and offered covered bonds in Europe on March 26, 2014.  Now, with the filing of a prospectus with the SEC, BNS is ready to offer covered bonds in the U.S. 



Year to date, the U.S. covered bond market has been very quiet.  Only two issuers have brought bonds to market for a total of $3 billion: Westpac Banking Corp. on May 14 and Commonwealth Bank of Australia on June 14, both privately placed offerings.  So far, no registered covered bonds have been issued in the U.S. in 2014.
[/columns]



                    [post_title] => BNS Files U.S. Prospectus
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On August 8, Morrison & Foerster LLP filed a comment letter with the United States Department of the Treasury in response to a request for comments on the private sector development of a well-functioning private label securities (PLS) market for residential mortgage loans.  The comment letter notes that perhaps the easiest way to restore private funding to residential mortgage loans in the United States is to implement a covered bond statute in the United States to enable U.S. banks to issue covered bonds.  The letter notes that the conditions necessary to the establishment of a covered bod market in the United States are well advanced and that the market could be established quickly.  Based on the development of the investor base in the United States, the SEC's establishment of disclosure and reporting standards, and the well-developed legislation, creation of a domestic covered bond market would appear to be low hanging fruit that Treasury should take advantage of.  
[/columns]


                    [post_title] => Comment Letter to Treasury on Restoring PLS Market
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Covered Bonds in the United States - Latest News




[metaslider id=3641]














Updated: 01/20/2017









 
Follow us at @uscoveredbonds








 





See the infographic on U.S.$ covered bond statistics for the period 2010 through 2016.







Commentary



1/20/2017
New Administration - what does it mean? Still too early to tell.  Treasury Secretary-designate Mnuchin indicated in his confirmation hearing testimony that the administration intended to move to address Fannie Mae and Freddie Mac.  There has also been some quiet indications that covered bonds are again on the agenda.  However, it is still early days, too early to know if covered bonds will play a role in a new housing finance system.
 



Nov 2016- Trump won?! What!?  Really?! Whoa!  Now what? And what does it mean for covered bonds? What does it mean for the GSEs?  Good questions! But not questions we have answers to right now.  It's too soon.


It would not be a surprise to see the Republicans in Congress tackle GSE reform.  But the nature of the reform is not clear.  It is likely that some reduction in the role of the Government in housing finance would be part of the reform, but this will be a contentious issue with the Democrats and one they might filibuster in the Senate, so it will take some support from Democrats to reach a 60-vote majority needed to defeat a filibuster.  That means compromise somewhere to bring in the necessary Democrats.



The covered bond picture is more nuanced.  First, the role of the GSEs in housing finance has to be reduced before the banks will look to other means of finance for mortgage loans.  Second, the champion of covered bonds over the last six years has been Representative Scott Garrett (R-NJ), who was defeated in the election and will not be returning to the House next year.  There is no apparent successor to pick up the baton.  With an expected heavy focus on reducing banking regulation, covered bond legislation may never see the light of day.  So keep your fingers crossed for someone to perceive the benefit of covered bonds in a changed housing finance framework.


    July 2016- 2016  is of course a Presidential election year in the United States. It seems pretty unlikely, therefore, that we will see any progress in 2016 on covered bond legislation, in part also because it is unlikely we will see any movement on GSE reform.  Particularly GSE reform turns on the outcome of the election and covered bond legislation seems closely tied to GSE reform.  See Why is CB legislation tied to GSE reform?  Unfortunately, it looks like a long wait until 2017 for covered bond legislation in the United States, notwithstanding the positive comment from Rep. Scott Garrett (see below).


    Nov 2015- Rep. Scott Garrett reportedly told the audience at a mortgage industry conference in New York on November 12 that with the lifting of the federal debt ceiling it might be possible now to pass a covered bond bill in the Senate. The conference was the 2nd Annual Private Label RMBS Reform Symposium, sponsored by the Structured Finance Industry Group and IMN.


        Why do investors like covered bonds? - What is it about covered bonds?


	Why not covered bonds? - What's to lose?


	Jan 2015- Congress schedules covered bond review.  With the beginning of the new  Congressional term, the House Financial Services Committee released its Oversight Plan, which includes a statement that the "Committee will examine the potential for covered bonds to increase mortgage and broader asset class financing, improve underwriting standards, and strengthen U.S. financial institutions."  See the related article posted on January 23 in The Covered Bond Report.
  

       Canada Housing Overvalued - The Bank of Canada reports that Canadian housing is up to 30% overvalued.   However, the Bank says that household imbalances remain the most important risk to stability.


	Use CBs to Restore PLS - Can covered bonds assist the recovery of the PLS market by allowing the GSEs to shrink faster?


	GSE Reform - A disquieting process


	Mortgage Rates - Are they uncompetitive?


	US Legislation - Why is legislation taking so long? Does the U.S. not see the benefit of covered bonds?


	Pass-Through CBs - Given the long RMBS history in the U.S. would pass-through covered bonds work here?


	Housing Bubble? Is there a housing bubble in Canada?






Non-Canada US$ Issuers


         KHFC and Kookmin return to the U.S. dollar market, each for $500 million, on Nov 12 and Jan 22

        Westpac - Back in the dollar market with a $1 billion 2.250% offering due 2020 on Nov 2

        KHFC - In its initial legislative offering, Korea Housing Finance priced a 5 year $500M 2.500% on Nov 12

        Kookmin Bank - In the first ever Korean legislative covered bond, Kookmin priced a5 year $500M 2.125% on Oct 14

        DBS Bank - in its inaugural covered bond offering, DBS priced a $1.000B 1.625% three year in a 144A offering on Jul 29

        Westpac and CBA - Australians are half of the July supply: Westpac with an $800 M 3yr on Jul 7 and CBA with a $1,000 M 5yr on Jul 9
       




Hot Topics


	CBs as HQLA - should covered bonds qualify in U.S. as high quality liquid assets for LCR purposes?

	Encumbrance - why such a hot topic?

	Anemic RMBS - CMBS and CLOs are booming, but not RMBS. What does that tell us?












Canadian Issuers

maple leaf

Dec 2016- 
2016 has been a good year for Canadian issuance of covered bonds.  Canadian banks came to the market with 34 offerings of covered bonds in $, €, £, C$ and A$ currencies.  Five of those offerings were reopenings of existing series of covered bonds by CIBC, RBC and TD.  The distribution of offerings across currencies was as follows:





Currency	# Offerings	Amount



€	14	12,861


$		6		9,250


C$		3	4,500


£		10		2,625


A$		1		400



See Canadian Issuance.




     Feb 2016- Change Canada's 4% Limit? OSFI is apparently considering raising the 4% of total assets limit on the issuance of covered bonds. See OSFI to Reconsider 4% Limit?


     Jan 2016- 2016 began with a flurry of Canadian offerings. Seventeen offerings in all in the first two weeks; six covered bonds: TD Bank CBL10 (€1.000B), RBC CB28 (€0.100B), CIBC Tap CBL8 (€0.100B), BNS CBL11 (£0.400B), BMO CBL7 (€1.500B), BNS CBL12 (€1.500B); and eleven senior notes: BNS $1.000B, $0.500B,  €0.050B,  £0.300B and  €1.500B; 
  BMO £0.217; TD Bank $0.750B and $0.500B; and RBC $1.250B,  €500 and  £200. See CDN Issue Details and MTNs.  A pretty remarkable showing in a volatile market for the start of 2016. Perhaps the best commentary on the overall market conditions one day last week came from Citibank MD Laura Drumm: "Well, that was ugly ...".
     




Regulatory Developments


	BCBS - Basle has announced increased capital requirements for securitization exposures.  See the full report.

	Final Risk Retention - The SEC has finalized its risk retention rule for securitizations.  See the full text of the final rule. 

	Reg AB II and Covered Bonds - Generally Reg AB II is not going to apply to covered bonds. Canadians?

	Final Reg AB II - SEC finalizes the amendments to Regulation AB

        U.S. Treasury - United States Department of the Treasury has requested comments on the private sector development of a well-functioning private label securities (PLS) market for residential mortgage loans.  See the original request.

	LCR in Canada Covered bonds qualify for LCR Level 2A.

	Volcker Rule - only foreign bank covered bonds are carved out of the prohibitions in the rule?






Technical Notes










                    [post_title] => Home-old
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                    [post_date] => 2014-07-16 13:47:08
                    [post_date_gmt] => 2014-07-16 17:47:08
                    [post_content] => 
On July 8, Moody’s followed up on its June 11 announcement regarding risk related to a “bail-in” regime in Canada with an announcement of the change to “outlook negative” in Global Credit Research.  Additionally, Moody’s notes that “high household indebtedness and elevated housing prices remain key risks to banking system stability in Canada”.  Further, Moody’s states that “growth sought by the banks has led them to diversify into riskier businesses and geographies which dilute their strong domestic credit profiles and represent a growing risk to the Canadian system's stability”.



                    [post_title] => Moody's expects lower predictability of government support for Canadian banks; changes banking system outlook to negative
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                    [post_date] => 2014-07-08 18:39:13
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                    [post_content] => 
On July 1, 2014, the European Banking Authority published a favorable opinion on the preferential capital treatment of covered bonds.  The EBA also delivered a companion report entitled EBA Report on EU Covered Bond Frameworks and Capital Treatment.  See also the press release from the EBA.  The EBA concluded that the favorable capital treatment under the capital requirements regulation (CRR) for bank investments in covered bonds was appropriate, but called for some “further qualifying criteria for their preferential treatment.”  The EBA recommended against the use of aircraft liens, residential mortgage backed securities (RMBS) and commercial mortgage backed securities (CMBS) as cover pool assets after December 2017.  The opinion and the report were delivered to the European Commission in response to a request for advice.



With respect to favorable capital treatment the EBA said:


“Due to the good historical default/loss performance of covered bonds in the EU, the dual recourse principle embedded in covered bond frameworks whereby the covered bond holder has a claim on the issuing institution and a priority claim on the cover assets, the special public supervision for the protection of the bondholders mandated by the UCITS Directive and the existence of qualifying criteria in Article 129 of the CRR, the EBA considers the preferential risk weight treatment laid down in Article 129 of the CRR to be, in principle, an appropriate prudential treatment. “



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                    [post_date] => 2014-07-08 18:27:39
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                    [post_content] => 
Speaking in Washington on June 26 before the Making Homes Affordable Five Year Anniversary Summit, U.S. Secretary of the Treasury, Jacob Lew, gave a speech in which he addressed the need for housing finance reform. He also noted almost a complete absence of a private label securities market almost six years after the crisis and a need to restore private funding to the residential mortgage market. He noted that a series of questions was posted to the Treasury website seeking comment by August 8, 2014 on recommendations for reviving the private label securities market.



Neither Secretary Lew’s speech nor the posted questions mention covered bonds. Clearly covered bond legislation for the United States should be considered by the Treasury. The legislation introduced in 2011 by Representative Garrett, H.R. 940, passed the House Financial Services Committee by a very strong bi-partisan vote of 44-7. Passage of covered bond legislation should be easily achievable with Treasury backing and covered bonds could provide an important channel of private funding for the mortgage market. After all, covered bonds provide funding for about €3 trillion in the European market and the domestic U.S. market for covered bonds issued by foreign has shown healthy growth.



                    [post_title] => Treasury trying to encourage private funding
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Updated: 1/18/2022




U.S. Covered Bond Legislation



    
       
       
       
       
    
    

       Bill No.SponsorTitleNotes
    


     

        2022 Bills
        

     

        None
        
        
        
       


     

        2021 Bills
        

     

        None
        
        
        
       


     

        2020 Bills
        

     

        None
        
        
        
       


     

        2019 Bills
        

     

        None
        
        
        
       


     

        2018 Bills
        

     

        None
        
        
        
       


     

        2017 Bills
        

     

        None
        
        
        
       


     

        2016 Bills
        

     

        None
        
        
        
       


     

        2015 Bills
        

     

        None
        
        
        
       


     

        2014 Bills
        

     

        S.1217 Amendment
        Johnson, Crapo
        Housing Finance Reform and Taxpayer Protection Act of 2013
        The amendment does not add covered bond provisions.
4/29/2014:
Committee on Banking, Housing, and Urban Affairs. Committee consideration and Mark Up Session held.

5/15/2014:
Committee on Banking, Housing, and Urban Affairs. Ordered to be reported with an amendment in the nature of a substitute favorably.

9/18/2014:
Committee on Banking, Housing, and Urban Affairs. Reported by Senator Johnson SD, with an amendment in the nature of a substitute. Without written report.

9/18/2014:
Placed on Senate Legislative Calendar under General Orders. Calendar No. 579.		
       

    
     

        2013 Bills
     

     

        S.1217
        Hagan, Corker
        Housing Finance Reform and Taxpayer Protection Act of 2013
        This is a bi-partisan Senate version of GSE reform.  There are no covered bond provisions in this bill.  The hope was that covered bond provisions would be added in the Conference Committee.
7/23/2013:
Committee on Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance, and Investment. Hearings held.

9/12/2013:
Committee on Banking, Housing, and Urban Affairs. Hearings held.

10/1/2013:
Committee on Banking, Housing, and Urban Affairs. Hearings held.

10/29/2013:
Committee on Banking, Housing, and Urban Affairs. Hearings held.

10/31/2013:
Committee on Banking, Housing, and Urban Affairs. Hearings held.

11/5/2013:
Committee on Banking, Housing, and Urban Affairs. Hearings held.

11/7/2013:
Committee on Banking, Housing, and Urban Affairs. Hearings held.

11/21/2013:
Committee on Banking, Housing, and Urban Affairs. Hearings held.

11/22/2013:
Committee on Banking, Housing, and Urban Affairs. Hearings held.

12/10/2013:
Committee on Banking, Housing, and Urban Affairs. Hearings held.		
       

     

        H.R.2767
        Garrett
52 co-sponsors		
        PATH Act of 2013
        This is the Republican version of GSE reform.  It includes covered bond provisions very similar to H.R.940.  The bill passed the House Financial Services Committee on a strict party line vote.
7/24/2013: Committee Consideration and Mark-up Session Held.
7/24/2013: Ordered to be Reported (Amended) by the Yeas and Nays: 30 - 27.

7/22/2013: Referred to House Ways and Means		
       

    
     

        2012 Bills
     

     

        
        
        
        
       

    
     

        2011 Bills
     

     

        H.R.940
        Garrett, Maloney
        U.S. Covered Bond Act of 2011
HSFC Committee Report		
        This bill passed the HFSC by a very strong bi-partisan vote of 44-7.  The nay votes were related principally to the committee voting down amendments sought by the FDIC.
6/22/2011: Committee Consideration and Mark-up Session Held.
6/22/2011: Ordered to be Reported (Amended) by the Yeas and Nays: 44 - 7 and 3 Present.
12/31/2012 7:01pm: Committee on Ways and Means discharged.
12/31/2012 7:01pm: Placed on the Union Calendar, Calendar No. 542.		
       

     

        S.1835
        Hagan, Corker, Crapo, Schumer
        U.S. Covered Bond Act of 2011
        This bill was very similar to H.R.940, but excluded the tax provisions.
       

    
     

        2010 Bills
     

     

        H.R.5823
        Garrett
         U.S. Covered Bond Act of 2010

             Manager's Amendment

             Bean Amendment

             Garrett 2d degree amendment

             Bean Amendment 54 (withdrawn)

             Chairwoman Bair's Letter

             Archived webcast of July 28, hearing 		
        7/28/2010:
Committee Consideration and Mark-up Session Held.

7/28/2010:
Ordered to be Reported (Amended) by Voice Vote.		
       

     

        H.R.4884
        Garrett, Bachus, Kanjorski
        U.S. Covered Bond Act of 2010
        3/18/2010:
Referred to House Financial Services

3/18/2010:
Referred to House Ways and Means		
       

    
     

        2009 Bills
     

     

        H.R.2896
        Garrett, Bachus, Kanjorski, Paulsen
        Equal Treatment for Covered Bonds Act of 2009
        
       

    
     

        2008 Bills
     

     

        H.R.6659
        Garrett, Bachmann, Bachus, Hensarling, Weldon
        Equal Treatment for Covered Bonds Act of 2008
        
       





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                    [post_date] => 2014-06-12 17:23:36
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On June 11, 2014, Moody's Investors Service changed the outlook of the seven largest Canadian banks from stable to negative and confirmed each of their long-term ratings.  Moody's stated that the action was taken in response to previously announced plans of the Canadian government to implement a "bail-in" regime for Canada.  In Moody's view, the balance of risks for senior debt holders and uninsured depositors of Canadian banks "has shifted to the downside."


This rating action by Moddy's has not affected the rating of any outstanding covered bonds issued by the banks.  The current long-term ratings of the banks by Moody's range from Aa3 to Aa1.




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Updated: 1/3/2017




U.S. Legislative and Regulatory Links





  

    

  Housing & CB Legislation

2014 Legislation 
  
           H.R.5055

    S.1217

    
     Johnson-Crapo


     Johnson-Crapo Amended
     (not posted yet)


     H.R. 2767


2013 Legislation


        S.1217

    
        H.R.2767


2011 Legislation


        S.1835

    
        H.R.940

    
        H.R.940 House Report

    		
        

Other Legislation

  Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

    		
    

Regulations of Interest

  Reg AB II Final

 NRSRO Rule


    Volcker Rule


    QM Rule

   US Basel III Implementation

   Regulatory Capital Rule

    Enhanced Prudential Standards

    US LCR Final

    Swap Margin Proposal"

    CFTC 12-45

     JPM Regulatory Update 3Q

   		
    

  Other Links

    Congress.gov

    Thomas Library of Congress

    Fed Reg

    GPO FDsys


    CFPB

    CFTC

    FDIC

    FHFA

    Federal Reserve

    FSOC

    NCUA

    OCC

    OTS

    PCAOB

     SEC

     		
  






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                    [post_date] => 2014-03-17 09:55:11
                    [post_date_gmt] => 2014-03-17 13:55:11
                    [post_content] => [columns count="2" gap="3em"] 
On Sunday, March 16, 2014, the Senate Banking Committee  released a draft of an Amendment to S. 1217, which is the housing finance  reform bill introduced last year by Committee members Mark Warner (D-VA) and Bob  Corker (R-TN) to shut down FNMA and FHLMC and establish a new federal role for  housing finance.  The amendment released  by the Committee is authored by Committee Chairman Timothy Johnson (D-SD) and  Ranking Member Michael Crapo (R-ID).  The  amendment is introduced following a series of hearings held by the Committee last  fall on S. 1217.  Most significantly, the  amendment continues to provide for the establishment of the Federal Mortgage  Insurance Corporation and the elimination of FNMA and FHLMC.


The general view is that S. 1217 is likely to be the basis of any bill adopted to reform housing finance.  Unfortunately  for covered bonds, there is nothing in the amendment, and nothing in the  original bill, to establish a statutory covered bond regime in the United  States.  Accordingly, any hope for  including covered bond provisions in the bill apparently rests with the House  including such provisions in any final bill through the conference committee  process. 


  However, a strong majority of those present at a panel on  housing finance reform at the SFIG conference this year in Las Vegas do not  expect housing reform legislation to be enacted before 2017.  The best prospects then for covered bond  legislation in the near future probably lie elsewhere.
[/columns]



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                    [post_content] => [columns count="2" gap="3em"]
The Financial Times reports that “Pimco goes bearish on Canada” (Pimco goes bearish on Canada, FT, p. 16, March 3, 2014).  The article reported that the Pimco Total Return Fund had reduced its holdings of Canadian debt by about 50% due to its concerns about housing prices in Canada.  Pimco is reported to be expecting a decline in housing activity and prices this year due to tightening of mortgage credit and an increase in loan rates.  The decline in prices is expected to be as much as 30% over the next two to five years, so a gradual decline over several years rather than an abrupt market fall.  Other reports express a concern about the high levels of consumer indebtedness in Canada and the rapid rise in housing prices.
  [/columns]



                    [post_title] => Another View on Canadian Housing
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On February 25, 2014, the SEC requested comment on a new proposal for disclosing asset-level information in connection with asset-backed securities.  This is a reopening of a request for comment originally made in 2010 in connection with the proposal for amending Regulation AB. Under the new disclosure proposal, the issuer of ABS would disclose asset-level information on its website rather than submitting such information to the SEC for disclosure through the SEC’s EDGAR system.  This new proposal was made in response to comments on the original proposal that raised significant privacy concerns.



The SEC proposes that issuers could restrict access to asset-level information only to investors in the related ABS and could require investors to certify that they would not “reverse engineer” downloaded data.



Under existing registration statements, the SEC does not require covered bond issuers to make asset-level information available. The no-action relief granted to Canadian covered bond issuers (see, e.g., the RBC letter) recognizes that covered bonds are not ABS, but nevertheless require disclosures regarding the cover pool assets consistent with ABS disclosure required under Regulation AB. The SEC has not committed to continue to take that position after the adoption of the amendments to Regulation AB.  Accordingly, covered bond issuers who issue into the U.S. have been waiting see whether the new Regulation AB (Reg AB II) would require disclosure of asset-level information for covered bonds.  This request for comment does not shed any light on that question.
[/columns]



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Updated: 5/18/2015






Two U.S. banks issued covered bonds in 2006 and 2007. No U.S. banks have issued covered bonds since, due in part to the complexity of issuing structure used by U.S. banks. Legislation to implement covered bonds in the U.S. would change this.  The benefits of covered bonds to both the issuing bank and to investors is set out below.  These benefits would seem to provide a strong rationale for passing covered bond legislation.



The covered bond market in Europe is about $3 trillion of outstanding bonds.  This suggests that covered bonds could provide a significant funding instrument for banks in the U.S.  While no one expects covered bonds to provide all of the funding for residential mortgage loans in the U.S., given the historic role of the federal government in the market, covered bonds could be a significant factor.  The combination of covered bonds, RMBS, FHLB loans and GNMA/FNMA/FHLMC would provide banks with improved diversity of funding.








What are covered bonds?

CB Handbook
 
Covered bonds are senior, secured debt of a regulated financial institution.  As in typical secured debt, if the issuing bank defaults, the collateral is used to cover any shortfall in payments due by the bank on the covered bonds.  With covered bonds there is the added feature that, so long as there is sufficient collateral, the covered bonds are not accelerated, but rather paid on their scheduled payment dates.   If the collateral at any time is inadequate to make all scheduled payments on the covered bonds, all outstanding covered bonds are accelerated and paid pro rata from the proceeds of the collateral in the same manner as typical secured debt.  For a detailed description of covered bonds, see Covered Bonds Handbook available from the Practicing Law Institute.  See also the Covered Bond website at Mayer Brown LLP.


CB Map

Covered bonds come in differed forms, depending on the jurisdiction of the issuer.  In some jurisdictions, such as Germany, the collateral is held by the issuing bank and is isolated on its balance sheet and pledged to support the bonds.  In other jurisdictions, such as the U.K., the collateral is transferred to a subsidiary of the issuing bank and the subsidiary guarantees bonds issued by the bank and secures the guarantee with the collateral.  (See the accompanying map of the covered bond market, provided by Global Capital, for a list of jurisdictions with covered bonds.) The subsidiary, in effect, is only a security device to hold the collateral separate from the issuing bank in case of its insolvency. This two-tier arrangement is necessary in jurisdictions that do not have a special statute for covered bonds.  



The collateral and any related interest rate and currency swaps are referred to as the “cover pool.”  For the protection of investors, the adequacy of the assets in the cover pool to pay the covered bonds as scheduled is tested monthly.  If the test is not passed, additional collateral must be added to the cover pool by the issuer.



Most often the collateral consists of residential mortgage loans, but some jurisdictions permit commercial mortgage loans, ship mortgage loans, and obligations of public sector entities.



In the single tier form, it is clear that the collateral continues to be owned by the issuing bank and is simply pledged to support the bonds.  In the two-tier structure, the collateral is transferred to the subsidiary, but the bank continues to have an economic interest in the performance of the collateral.  The collateral held by the subsidiary will be consolidated back onto the balance sheet of the issuing bank and losses on the collateral will be losses, on a consolidated basis, for the bank.  Thus the bank continues to own the collateral as an indirect owner.  
 



ASF 2014



Covered bonds, then, are dual recourse instruments – the holder will look first to the bank for payment and, if the bank is unable to pay, the investor will look to the collateral.  Thus the creditworthiness of the bank is of primary concern to investors and the collateral is of secondary concern. See the slides presented at ASF 2014 for more detail on structure. 








Investor diversity.

 
The investors who purchase covered bonds typically purchase sovereign debt and agency debt.  They do not typically purchase corporate bonds or ABS securities.  These investors seek investments with low risk of principal acceleration due to issuer default or insolvency.  The certainty of payment at, but not before, maturity is an important feature.  Accordingly, this is a class of investors that an issuing bank does not reach except by issuing covered bonds, providing important diversity of funding for the issuing bank.



The investor base is comprised primarily of banks, central banks and investment funds.  Banks and central banks together are often 50% to 70% of the investor base of an offering.








Excellent funding rates.

 
This conservative class of investors is seeking a return that exceeds that of sovereign or agency debt, but with a similar risk profile.  This permits the issuing bank to fund itself with covered bonds at very attractive rates.  In fact, other than in times of severe turmoil, covered bonds are viewed as a ‘rates’ product and not a ‘credit’ product, similar to sovereign and agency debt.



For example, TD Bank in 2012 issued $3 billion of 5 year covered bonds at mid-swaps plus 45.  RBC in 2013 issued $2 billion of 5 year covered bonds at mid-swaps plus 43. This is very attractive funding.  BNS in 2014 issued €1.250 billiion of three year covered bonds at mid-swaps minus 4. 








Transparent to regulators.


From a regulator’s perspective, a bank’s exposure on its covered bonds is simpler to analyze than its securitization exposure.  As the numerous recent litigation settlements by banks has shown, securitization exposes banks to the risk of significant cost that is not apparent in the financial statements or other disclosures of the banks.  JPMorgan, for example, in a single settlement with the Justice department and various State attorneys general, recently settled one set of claims for $12 billion.  The aggregate settlement amount to date in the U.S. for the banking industry in early 2014 was estimated to be around $100 billion and there is more to come.  This exposure was not apparent to regulators pre-crisis.  Securitization had been viewed by banks and regulators as a transfer of risk of the assets to investors, relieving the banks of exposure to the assets.



Covered bonds do not present this hidden risk to regulators because the assets in the cover pool remain on the balance sheet of the issuing institution.  The nature and performance of the assets is a constant audit and financial reporting item, readily apparent to the supervising agencies.  Because the issuing institution retains 100% of the risk on the assets, it has a strong incentive to monitor and maintain high origination standards.  This incentive tends to align the interests of the banks and the regulators in a way that securitization never will.








Friendly to borrowers.

 
Covered bonds are friendlier to borrowers than securitization. In a securitization, loans are sold to a securitization vehicle; the selling bank ceases to be a contractual party to the loans.  As a consequence, the securitization entity acquires the right to make any and all decisions with respect to granting payment rescheduling or other relief to a borrower in financial difficulty or foreclosing on property securing a loan.  Securitization entities are bound typically by a trust agreement or pooling agreement that spells out all actions the entities may take with respect to the loans.  These provisions generally do not provide for discretion to be exercised by the securitization entities to work with borrowers to avoid default and foreclosure.



The transfer of a loan to the securitization entity means that a borrower can no longer discuss with his lender alternatives that the lender might offer to avoid default.  The lender no longer has the power to effect any relief for a deserving borrower.  That power has been transferred to a securitization entity and the securitization entity is typically bound by agreements not to provide such relief.



Additionally the borrower often has difficulty determining who may have some ability to grant relief.  The borrower’s loan may have been transferred through several entities before reaching the securitization entity.  And securitization entities do not have employees.  All actions of securitization entities are performed under contract by third parties including trustees and loan servicers.  Consequently, even identifying the party that may have the power to grant relief can be hard.  And if identified, locating the appropriate person at the third party can be yet another difficult task for a borrower.



Covered bonds do not create this obfuscation.  Each loan continues to be owned by the originating lender, who retains all rights to amend the loan or the payment terms or otherwise accommodate a borrower to preserve a performing loan.  It is possible that the loan may cease to be qualified to be included in a cover pool, but in that case, the lender simply substitutes another loan for the loan being worked out.  And from the borrower’s perspective, the borrower always deals solely with the lender that the borrower originally chose to borrow from and should have little difficulty identifying who in the organization might be able to provide relief.








Analytically simpler for investors.

 
Covered bonds also provide simplicity for an investor.  In contrast, a securitization presents a considerably more complex investment decision.  Securitizations typically involve complex security class structures that result in complex payment provisions.  An RMBS offering may involve 20 or 25 classes of securities supported from a single pool of loans.  And the class structures and payment mechanisms and priorities are very seldom the same on consecutive offerings.  Accordingly, on each offering an investor must commit significant resources to analyzing the precise terms of the proposed investment, in addition to analyzing the performance risks of the collateral pool, which will be unique for each offering.  And finally, the risk of early or delayed principal repayment must be analyzed, which risk can be critical to assessing the value of each class of securities.



Covered bonds, on the other hand, provide a simpler challenge to the investor.  A covered bond is primarily a senior debt offering of a regulated financial institution.  The institution is usually reviewed by several investment industry credit analysts, files extensive financial statements with regulators and exchanges, and has listed common stock that has a long history of public pricing.  The institution is audited regularly by independent auditors and supervised by regulators.  Moreover the senior debt of the institution is rated by rating agencies and traded in the secondary market, providing important pricing transparency and indications of continuing credit evaluations.



Only if the issuing institution defaults on its covered bond debt does the strength of the cover pool become important.  Until then the issuing institution is bound to continually refresh the cover pool with new loans to replace delinquent, defaulted or matured loans.  At all times prior to the default of the institution, the cover pool should consist of fully performing loans.



And while the cover pool may vary over time as new loans are added to the pool, the investor’s burden of analysis is considerably simpler than in a securitization.  First, all outstanding series of covered bonds of an issuing institution are secured by the same cover pool.  New assets can be added to the cover pool only if they satisfy the eligibility criteria that are set when the covered bond program is first established.  Thus an investor analyzes the strength of the cover pool once at its first purchase of a covered bond from an issuing institution based on the eligibility criteria and can purchase subsequent offerings by conducting a simplified ‘bring down’ analysis of continuing loan performance.



Moreover, covered bonds are not tranched, so there is no complex class structure and payment mechanism or priority.  And, because covered bonds are bullet pay securities, there is no prepayment risk to analyze.  Covered bonds are primarily a payment obligation of the issuing institution, so the credit analysis is primarily an analysis of the credit worthiness of the issuing institution.  This is a risk that is publicly reviewed by other analysts and supervised by regulatory authorities.



And, finally, the risk attendant to senior debt of being written down, or possibly eliminated or converted to equity, in the insolvency of an issuing institution is not present with covered bonds because the cover pool will continue to pay the covered bonds through their maturity date independent of the outcome of the resolution of the failed issuing institution.







                    [post_title] => The Case for U.S. Covered Bonds
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                    [post_content] => [columns count="2" gap="3em"] 
The Wall Street Journal reports in its February 19, 2014 paper that the campaign to prevent a housing bubble is gaining traction.  They report that many observers think the market is drastically overpriced and may be subject to t sharp correction.  The article reports that housing prices have doubled since 2002 and rose 9.5% in January compared to January 2013.  A chart shows average house prices in Vancouver at more than C$800,000 and in Toronto at more than C$500,000.  House prices are reported to be 50% above those in the U.S.  And the construction industry is reported to represent twice the percentage of the gross domestic product in Canada as in the U.S.


As noted elsewhere, however, this is not a repeat of the subprime mortgage debacle we had in the U.S. Canadian residential mortgage loans have much lower loan-to-value (LTV) ratios and are full recourse, so the borrower is unable to just turn over the keys and avoid the debt.  But these comparative numbers would suggest that Canadian consumers are carrying high levels of housing related indebtedness.  Small wonder that Canadian consumers are reported to have debt to asset ratios close to those of U.S. homeowners prior to the crisis.  And most of that asset value is from overpriced houses. A sharp correction in housing prices would hit consumers hard. 


See also, Is there a housing bubble in Canada?
 [/columns]


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In a letter to the SEC dated February 14, 2014, FINRA stated that during the fourth quarter of 2013, the issuance of mortgaged-related securities declined 33 percent compared to the same period in 2012.



                    [post_title] => More Views on Low RMBS Issuance
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With rising rates, new mortgage loan productions has declined. WSJ reports that in November the FED bought 90% of eligible mortgage bond issuance, up from 2/3 earlier in the year, raising liquidity concerns. FNMA/FHLMC issuance fell 59% from a year earlier in November to $82.3 B.



                    [post_title] => Fed Mortgage Role Expands
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PIMCO starts managed covered bond ETF fund; see article in Covered Bond Report 



                    [post_title] => PIMCO CB Fund
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Commentary




Updated: 1/30/2013





GSE Reform


Freddie Mac CampusIt is disquieting to see the frenzy around GSE reform in the absence of any fundamental analysis of what might be useful or essential in housing finance.  It appears to be assumed that U.S. government guarantees are essential for the preservation of the TBA market and the 30-year fixed rate mortgage.  But are the TBA market and the 30-year mortgage the the exclusive way to achieve housing policy goals?  And what are those policy goals?  There is no analysis of who needs government support and what the best form of support would be.  No analysis of what types of mortgage loans are best for different population segments.  Is a 15-year bi-weekly pay mortgage loan not better for some borrowers?  Is the government's role credit enhancement or liquidity?  Should the government guarantee loans or buy loans?  Does the government need to protect the financial industry from borrower default or to preserve access to funding at reasonable rates for qualifying borrowers despite cyclical downturns?  More fundamentally, who should be allocated interest rate risk?  Credit risk?  Prepayment risk?  And is the answer the same for all  mortgage loans?  Should mortgage interest be deductible for federal income tax purposes?  Should there be a limit?  How big a house is essential?  What are the minimum essential attributes and services of a  house to qualify for government support?  Solar panels?  Internet access?  Neighborhood schools?  Playgrounds?  Public transportation?  What is the appropriate balance of rental housing?  And should it be in single family or multi-family units?  Is it the same in all areas of the country?  And all age groups?  The answers might well dictate a landscape without a FNMA or a FHLMC.  


We have a once in a lifetime opportunity to reexamine housing goals and the division of responsibility between the public and private sectors.  This is a different world from 1938 when FNMA was formed.  We should rethink the role of the government and how that role is performed.  We need to question whether our needs and our capabilities are  the same as they were eighty years ago.


Where are the competitive lenders?


WaMu LogoBefore the crisis we had Countrywide, Washington Mutual, Wachovia, American Home Mortgage and a host of others that provided competition to the large money center banks.  No longer.  Washington Mutual went to JPMorgan, Wachovia to Wells Fargo and Countrywide to Bank of America/Merrill Lynch.  There has been a heavy concentration of residential mortgage origination capability into the large money center banks.  The spread between primary mortgage rates and mortgage bond yields is near all time highs at the same time that the spread between agency MBS and Treasuries is near all time lows (source: Absalon Project).  Historically that primary spread had been close to zero.  These numbers suggest an uncompetitive market.


Where will the competition come from?  REITs?  Mortgage companies?  Specialized mortgage banks?  Community banks?  Funds of various kinds?  How can the development be encouraged?  How should we try to shape this development?  Should this development be allowed outside the banking system?  Are certain types of lenders preferable to others?  Are there responsible ways to make liquidity available to them?  Should there be tax or capital preferences for them?  Should capital gains with respect to new lenders escape tax in the early years to encourage growth?  How should startups access the capital markets for mortgage finance?  Should there be a federal aggregator to assist smaller lenders access financing?  How do we encourage more private sector funding?  


These are important questions that will affect mortgage rates available to all borrowers and they should be part of the discussion of housing finance reform.  




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U.S. Legislation - Concerns




Updated: 1/18/2014






[columns count="2" gap="3em"]

Concerns about covered bonds


Best assets are taken away. Sometimes regulators are heard to complain that banks will use their best assets for covered bonds thus leaving the regulator, in the case of a failure of the issuing bank, with lower quality assets to meet the claims of depositors. There are several responses to this concern. First, there is a certain level of risk in financing long term assets like mortgage loans with short term deposits and therefore some benefit to financing mortgage loans with longer term liabilities. Second, the same complaint could be made, but never seems to be, about securitization - the bank will securitize its best assets and leave the regulator with lower quality assets. Third, the complaint says something about the regulatory environment that lets a bank originate lower quality assets. Mortgage loans cannot be the only quality assets a bank can orginate. And fourth, the complaint probably reflects a concer more with the size of the covered bond program relative to the bank's mortgage portfolio and therefore may be addressed with limits on issuance appropriate for the balance of different business lines of the bank. 


Refinance risk. Sometimes a concern is heard that covered bonds expose a bank to refinance risk when the covered bonds mature. Unlike a securitization, a bank continues to own the mortgage loans that are part of the cover pool. Thus when a series of covered bonds mature, the bank needs to find a new source of financing to pay off the maturing bonds and provide continued financing for the mortgage loan assets it holds. Most often this will be a new series of covered bonds, but there are also many other sources of funds available to a bank. This risk is reduced if covered bond maturities more closely match the maturities of the mortgage loans. But this ignores the fact that the bank is continuously originating new mortgage loans and the mortgage portfolio is not in run-off mode. The answer to the concern really is that banks are always faced with refinance risk as funding matures - this is not unique to covered bonds. If a bank is unable to securitize it will face similar problems as loans pooled for a securitization are usually financed temporarily by short term warehouse lines of credit that require loans to be withdrawn after a period of time. Similar risks arise whether a banks finances with deposits or term funding of any nature. If deposits are withdrawn or funding is not renewed, there will be a need for emergency funding typically provided through central banks. 


Continued origination required. By design, covered bonds are not pass-through securities. As assets amortize or mature, funds received are used to purchase more loans to maintain the required asset covereage ratio of the cover pool. This requires the continued origination of new mortgage loans. Thus there is risk that if the bank is unable to originate mortgage loans in sufficient volume the cover pool may breach the asset coverage test, resulting in an event of default for the covered bonds. This is a risk that does not exist with securitization, but only exists with on-balance sheet funding. The concern is addressed in part with a limit on the portion of the mortgage loan portfolio that can be used for covered bonds. But the larger concern is that if a bank is unable to originate new assets, it will need to begin shrinking its liabilities. After all, assets and liabilities need to match (accounting for equity of course). An over reliance on long term funding increases a bank's exposure to this risk, so it is properly addressed through managing the balance of funding maturities. 


Encumbrance. The concern about encumbrance of assets is addressed elsewhere. It is basically the same concern listed above regarding the best assets being unavailable to the regulator in the event of the failure of the bank. 


Covered bonds do not provide capital relief. True. The mortgage loans will continue to be carried on the balance sheet of the bank since they are owned by the guarantor, which is a subsidiary of the bank and consolidated on the bank's balance sheet. But few options exist for obtaining capital relief short of the outright sale of the mortgage loans. With the changing regulatory and accounting requirements, it is increasingly difficult for a bank to obtain capital relief through securitization, particularly when investors look for the securitizer to have a real continued interest in the performance of the assets. This requires a bank to keep a significant retained interest in the mortgage loans, complicating achieving capital relief. Funding mortgage loans through deposits or senior debt will not provide capital relief either. If there is a desire for capital relief, there will be a tendency to keep the best assets and sell or securitize the riskier assets as that probably will achieve the most capital relief. In that sense it is likely that the best assets will be used for covered bonds as some regulators complain. 

[/columns]




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Updated: 03/12/2020




Useful Links










  General Links

    USCBC

    ECBC

    Pfandbrief

    The Cover

    The Covered Bond Report

    IFR Covered Bonds

    U.K. Regulated Covered Bonds

    FSA RCB Factbook

    EBA

    ECB

    BOE

    CBIC

    Mayer Brown LLP


  




Legislative Links

  House Financial Services Committee

  Senate Banking Committee

  FDIC Policy Statement

  U.S. Treasury Best Practices

  Australian Legislation

  New Zealand Legislation


  




Canadian Links

    Issuance Tables

    OSFI and B-20 Guideline

    CMHC

    

    BNS Web Page

    BMO Web Page

    CCDQ Web Page

    CIBC Web Page

    HSBC Canada Web Page

    NBC Web Page

    RBC Web Page

    TD Web Page


  




  SEC Related Links

    RBC No-action Letter

    RBC Guarantor Filings

    RBC Registration Statement

    BNS No-action Letter

    BNS Guarantor Filings

    BNS Registration Statement

    BMO No-action Letter

    BMO Guarantor Filings

    BMO Registration Statement


  












Legislative and Regulatory Links







   

  Housing & CB Legislation

2014 Legislation 
  
           H.R.5055

    S.1217

           Johnson-Crapo

           Johnson-Crapo Amended
     (not posted yet)

           H.R. 2767


2013 Legislation

        S.1217

        H.R.2767


2011 Legislation

        S.1835

        H.R.940

        H.R.940 House Report


  




Other Legislation

     Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010


     EU Covered Bond Directive

     EU Covered Bond Regulation

     EU Capital Requirements Directive

     EU Liquidity Coverage Requirement Regulation

     EU Securitization Regulation


  




Regulations of Interest

     Reg AB II Final

     Credit Risk Retention

     NRSRO Rule

     Volcker Rule

     QM Rule

      

     US Basel III Implementation

     Regulatory Capital Rule

     Enhanced Prudential Standards

     US LCR Final

     Proposed US NSFR

     

     Swap Margin Proposal"

     CFTC 12-45

     JPM Regulatory Update 3Q


   




  Other Links

    Library of Congress/Legislation

    GPO/FR

    FR Documents

    GPO FDsys

    

    CFPB

    CFTC, CFTA and 
    CFTC Rules

    FDIC

    FHFA

    Federal Reserve, FRB Collateral List

    FSB

    FSOC

    NCUA

    OCC

    OTS

    PCAOB

    SEC and 
    SEC Rules

    Securities Laws: Chapters 2A - 2E

    

    RNS Today

     UK Morningstar NMS

     Luxembourg Stock Exchange

     Irish Stock Exchange


   







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Technical Notes




Updated: 1/03/2014









FED Eligibility


Only two countries issue covered bonds eligible for discount at the Federal Reserve discount window: the U.S. and Germany. See, FRB Collateral Guidance. It is curious why German Jumbo Pfandbriefe are eligible. Although issuers from other countries have expressed an interest in having their covered bonds added to the list, the FED has indicated that there are other regulatory matters that must be addressed first. In particular, the Dodd-Frank Reform Act requires the banking authorities to dispense with the use of ratings in their regulations. The alternative to ratings developed by the FED will be a key element in determining the discount to be applied to securities delivered to the discount window, including covered bonds. Accordingly, the FED is not inclined to expand the list of securities acceptable at the discount window until this regulatory requirement is addressed.


 

ECB Eligibility


In a significant development for Canadian issuers, RBC Covered bonds were granted eligibility at the European Central Bank. Therefore, banks located in the European Union that purchase RBC covered bonds can obtain funds from the ECB by pledging RBC covered bonds. This provides important liquidity to purchasers and enhances the value of the bonds. It is expected that other Canadian issuers will seek similar treatment. See, the story from Covered Bond Report on the development.


 

BOE Eligibility


Eligibility at the Bank of England is more challenging perhaps. The BOE provides information on collateral that may be delivered to the BOE transparency requirementshere. See, the BOE Market Notice for covered bond eligibility requirements for specific information for covered bonds. The CMHC regulations do not require that loan level data be made available to investors. Accordingly, none of the Canadian issuers currently provide loan level data. The BOE has not indicated a willingness to waive this requirement for issuers from jurisdictions where such disclosure is not required. BOE eligibility greatly affects market accessibility in the Sterling market, but few non-U.K. issuers have chosen to qualify under the BOE requirements. For the U.K. issuers, BOE eligibility is important because of the heavy use of self-held covered bond issuances that are designed to take to the BOE.



It will be interesting to see if the Canadians are willing to go to the expense of providing loan level data just for Sterling market access. They have achieved ECB eligibility without providing such data.


 

LCR Eligibility


What assets are eligible for U.S. banks for the liquidity coverage ratio under the U.S. implementation of Basel III is an important consideration. Unfortunately, it does not look like covered bonds will be included in that designation. See, Liquidity Coverage Ratio Impact on Covered Bonds.
The U.S. proposal (Liquidity Coverage Ratio; see also High Quality Liquid Assets) excludes from the designation of eligible assets liabilities of other banks, to avoid contagion in the financial system. This is in sharp contrast to the situation in Europe (see MoFo client alert) where the debate is about whether covered bonds should be included as eligible assets for Level I or Level II. The impact on the pricing of covered bonds in the U.S. market will therefore likely be adverse compared to Europe.



The rule proposal has the following specific language on covered bonds:

The proposed rule likely would not permit covered bonds and securities issued by public sector entities, such as a state, local authority, or other government subdivision below the level of a sovereign (including U.S. states and municipalities) to qualify as HQLA at this time. While these assets are assigned a 20 percent risk weight under the standardized approach for risk-weighted assets in the agencies' regulatory capital rules, the agencies believe that, at this time, these assets are not liquid and readily-marketable in U.S. markets and thus do not exhibit the liquidity characteristics necessary to be included in HQLA under this proposed rule. For example, securities issued by public sector entities generally have low average daily trading volumes. Covered bonds, in particular, exhibit significant risks regarding interconnectedness and wrong-way risk among companies in the financial sector such as regulated financial companies, investment companies, and non-regulated funds.

But see the discussion supporting covered bonds as high quality liquid assets for LCR purposes.


 

TRACE Eligibility


The TRACE system operated by FINRA has a significant impact on the secondary market for securities included in the TRACE system. The system reports trades in the secondary market, including price, size and timing, lending important transparency to those securities. In an important development arising out of the JOBS Act, FINRA is extending TRACE eligibility to securities issued under Rule 144A. This development will make virtually all covered bonds sold in the U.S. market TRACE eligible, improving both primary and secondary market pricing and secondary market liquidity. No longer is TRACE eligibility limited to SEC registered covered bonds.


 

INDEX Eligibility


The various bond indices play an important role in the market. See, for example, the Barclays Aggregate Index. Bonds that are index eligible generally will have better pricing in the primary market and better pricing and liquidity in the secondary market. Generally, SEC registered bonds are index eligible and bonds issued under Rule 144A are not eligible.







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More News & Views




Updated: 12/17/2013





2012

 






 David Power and Ben Colice accepting the award from Bill Thornhill.





2012 was a noteworthy year for covered bonds in the U.S.  Almost $44 billion of covered bonds were issued in the U.S. market and we ended the year with about $110 billion of covered bonds outstanding.  The market also saw a number of notable firsts.  The first SEC registered covered bond was offered by Royal Bank of Canada in September (prospectus available here).  The $2.5 billion 5 year offering was extremely well received, attracting investors who were looking at covered bonds for the first time.  The Cover awarded RBC its Editors Award for Most Innovative Deal of the Year at its annual awards dinner in Munich.  The market also saw the first 7 year covered bonds, from SpareBank, and  the first 10 year covered bonds, from ING Bank, significantly extending the curve.


The Canadian banks were the most active issuers in the market in 2012, even though by late June all but RBC were unable to issue further covered bonds because of new legislation.  The adoption of covered bond legislation by Canada in June was a significant development.  Canada Mortgage and Housing Corporation (CMHC) was appointed as covered bond regulator and published its new regulations for registering issuers and covered bond programs in December.  In a fundamental change for all of the banks (other than RBC), CMHC insured mortgage loans will no longer be eligible assets in covered bond programs.  Accordingly, all of the Canadian banks (other then RBC) were required to establish new covered bond programs that use uninsured mortgage loans.  All of the banks (including RBC) must register their programs with CMHC under the new regulations before issuing further covered bonds.







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U.S. Legislation - The Long Gestation




Updated: 12/10/2013






[columns count="2" gap="3em"]

The Long Gestation





Australia recently adopted covered bond legislation.  New Zealand is also reviewing new legislation.  Countries seem to be able to adopt covered bond statutes in a single legislative session.  But not in the U.S.  We have been introducing covered bond legislation in the U..S Congress since 2008.  Why is U.S. legislation taking so long?  Why does the U.S. not see the benefit to covered bond legislation?  Given its long, untroubled history, why are covered bonds not seen in the U.S. as an attractive remedy for the toxic securitizations that triggered the financial crisis?



The answer is complex and related to the unique US history of housing finance.  Two major US legislative initiatives of the Great Depression addressing a severely damaged housing market created the Federal Home Loan Bank (FHLB) system, to support banks providing mortgage finance, and the Federal National Mortgage Association (FNMA), to support the secondary market in market in mortgage loans.   These actions provided an implicit federal government guarantee to residential mortgage loans, which over time came to dominate housing finance and planning.  It also installed the 30 year fixed rate mortgage as the standard for the market.  Over time there developed a TBA (to be announced) market, permitting prospective purchasers to lock in a mortgage rate prior to committing to purchase a house.  The 30 year mortgage and the TBA market have become such staples of U.S. housing finance that it seems no alternative market architecture will be acceptable without them.


In Europe covered bonds provide the primary means of accessing the capital markets to finance residential mortgage loans. Generally, there are no government agencies similar to FNMA and FHLMC. Thus in Europe there is an urgency to covered bond legislation that is not present in the U.S.



During the financial crisis, FNMA and FHLMC (established in 1970 to provide competition for FNMA) were used as instruments of government policy to prevent a total collapse of prices in housing, even though they were insolvent and in receivership.  At the high point, they provided financing for about 95% of all new mortgage loans.  The private RMBS market disappeared and hasn’t returned.  By some, FNMA and FHLMC are viewed as saviors of the housing sector.



The receivership of FNMA and FHLMC and their proposed dissolution are driving an intense debate (see GSE Reform) over how to reform U.S. housing finance while preserving the TBA market and the 30 year mortgage.  While the dialog refers to the need to restore private financing to the housing market, the primary focus is on reforming the role of the government in housing finance and preserving the benefits provided by FNMA and FHLMC.  It seems that most of the participants in the housing sector would prefer to have a government guarantee on every mortgage, including home builders, home buyers, bond traders, housing advocates and lenders.  It would provide the cheapest financing for home buyers, it would provide a very broad, uniform secondary market and it would provide support for low income families.  As with any addiction, it is habit forming and the participants will struggle to avoid recovering from it.



At the same time, banks are not experiencing funding pressure for new mortgage loans; FNMA and FHLMC still provide financing for about 90% of new mortgage loans and the balance can be comfortably funded with deposits.  General economic growth is moderate enough that other lending activity is not putting competing pressure on mortgage funding.



This plays out against the backdrop of implementing the new Basel III capital requirements, Volker Rule prohibition on proprietary trading, special requirements for systemically important financial institutions, sharply expanded CFTC regulation of swaps and derivatives and CFPB regulation of mortgage lending and servicing.



The net result is little time or attention at the major mortgage lenders being directed at alternative mortgage finance, including covered bonds.  Hopefully in 2014 this will begin to change as many of those crisis related changes are implemented and settle in.



[/columns]



                    [post_title] => US Legislation – The Long Gestation
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Miscellaneous News




Updated: 5/29/2014





Miscellaneous




Volcker Rule


The Volcker Rule implements Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The rule was finalized by the federal banking agencies and the CFTC and the SEC in December and curtails bank securities trading and investment in trading vehicles like hedge funds, private equity funds and securities arbitrage vehicles, which are referred to as covered funds.  Securities underwriting and marketmaking should be largely unaffected.  Banks will be unable to do some forms of securitizations, including many securities repackagings.



But all of this should have little impact on covered bonds.  The classic legislative covered bond is issued in a single tier structure directly from the bank.  The bank as an issuer would not be a covered fund, so Volcker would not be a consideration. The two-tier structure, used for example in Canada and the UK, utilizes an SPV to hold the cover pool and issue a guarantee.  The SPV is not a bank and therefore must be analyzed under the Volcker rule to determine if it is a covered fund.  The Rule provides an express exemption from the covered fund definition for covered bonds issued by foreign banks.  Domestic US banks could use the exemption for wholly owned subsidiaries if the two-tier structure were used by US banks to issue covered bonds.  In addition, the SPV in the two-tier structure can often rely on an Investment Company Act exemption other than 3(c)(1) or 3(c)(7) - usually Section 3(c)(5) or Rule 3a-7. Use of the single tier structure by US banks would require legislation.



An investment in covered bonds by a bank should be unaffected because covered bonds should not be characterized as an ‘ownership interest’ in a covered fund. Covered bonds have none of the characteristics of control or right to profits that are necessary for an ownership interest.



Pass-Through Covered Bonds


The latest development in the covered bond world has been the adoption of pass-through covered bond structures (see also the prospectus).  In pass-through covered bond structures, if the issuing bank becomes insolvent the principal payments from the assets in the cover pool are passed through to holder of the covered bonds on each payment date; i.e., outstanding principal on the bonds is amortized as payments are received.  This amortization feature is very familiar to investors in RMBS and FNMA/FHLMC pass-through certificates.  Although pass-through covered bonds have initially been issued in Europe, such bonds may be welcomed in the US as well.  There is clearly a large investor base in the US market that is familiar with amortization and may find such a feature attractive since it recovers quicker an investment in a covered bond issued by a bank that subsequently fails.



On the issuer side, the amortization feature in covered bonds permits lower over-collateralization levels in cover pool, which is particularly attractive to cover pools consisting of lower quality collateral.



It will be interesting to see how the US market reacts to this development.



CBs as HQLA


Should covered bonds qualify as high quality liquid assets for the liquidity coverage ratio under the recent proposal from the U.S. banking agencies? After all, covered bonds qualify as HQLA for the LCR under the proposal in Europe, although it is still under debate whether they should qualify as Level 1 or Level 2 assets. The U.S. banking agencies are more conservative in qualifying Level 1 assets, permitting only direct U.S. government risk and certain foreign sovereigns and multilateral organizations. Thus, bonds from FNMA and FHLMC qualify as Level 2A assets under the U.S. proposal, but the release states that covered bonds represent unacceptable interconnectedness and wrong way risk among financial institutions. 


That view, however, seems to misperceive covered bonds. While investors will purchase covered bonds primarily on the rating of the bank, the ultimate risk of default on a covered bond lies with the cover pool protecting the bonds. The risk in covered bonds, therefore, is not a risk of financial institutions in the banking system, but rather a risk connected to the housing market. That housing market risk is acceptable for FNMA and FHLMC bonds in Level 2A. There shouldn't be a different result for covered bonds. 


And the U.S. market trading data shows covered bonds being very actively traded.  There are many covered bonds among the most actively traded AAA securities. Moreover, most covered bonds are eligible collateral at the ECB, which adds substantial liquidity to the secondary market for covered bonds. Covered bonds also exhibit a desireable flight to quality.  In a January 9 report, Danske Bank [reports] that in Italy, Spain and Portugal tier 1 covered bond issuers trade significantly tighter than their sovereign and in France and Belgium they trade very close to their sovereign and even through in some cases.


This would seem to be exactly the kind of instrument you want for liquid assets held for a liquidity coverage ratio.






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FT on 12/2/2013 said that CMBS issuance is at the highest since the crisis with year to date issuance at $92.9B. CLO issuance is also booming, but RMBS issuance is anemic. Why is that? Is it because of FNMA and FHLMC? See, CMBS and CLOs are booming, but not RMBS. What does that tell us?



                    [post_title] => Why is RMBS issuance not growing?
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Basics of the U.S. Market




Updated: 12/28/2015








Today the covered bond market in the United States is essentially a non-U.S. financial institution market.  While two U.S. financial institutions (Washington Mutual and Bank of America) issued covered bonds in 2006 and 2007, since then there has been no issuance by domestic banks.  This is due in part to the lack of a statute in the U.S. enabling U.S. institutions to issue covered bonds. (See U.S. Legislation).



Since 2010, however, non-U.S. banks have with increasing frequency come to the U.S. to offer their covered bonds.  Today this is a $160 billion market in the U.S., still small compared to Europe, but growing quickly.  The market has had some very attractive pricing. For example, in late 2011 Toronto-Dominion Bank issued a $2 billion 3 year at mid-swaps +44 and a $3 billion 5 year at mid-swaps +26. In a different market in September 2012, Royal Bank of Canada issued the first SEC registered covered bond, a $2.5 billion due 2017, at mid-swaps +35. And in offerings that extended the maturity curve, SpareBank issued a $1.0 billion 7 year at mid-swaps +75 and ING Bank issued a $1.5 billion 10 year at mid-swaps +98, both in November 2012. In July 2015, new entrant, DBS Bank Ltd of Singapore, issued its first-ever covered bond, a $1 billion offering that priced at mid-swaps +37. 



What are Covered Bonds






A covered bond is a senior obligation of the issuing financial institution that is secured, or guaranteed by a guarantee that is secured, by a cover pool of high quality assets.  (See What Are Covered Bonds?)  The most common assets are residential mortgage loans, but depending on the issuer’s jurisdiction may also include commercial mortgage loans, public sector obligations and ship mortgage loans.The unique feature of a covered bond is that if the issuer becomes insolvent, the bond is not accelerated and the assets in the cover pool are segregated from the other assets of the issuer and administered exclusively to pay the outstanding covered bonds as scheduled through their scheduled maturity date.



Covered bonds are viewed as very low risk by investors because of the dual recourse provisions of the instrument.  Generally, covered bonds are purchased by the same investors that buy sovereign debt or agency debt.  The risk is viewed as similar, the yield is better.  During the euro crisis, in some jurisdictions, covered bonds of domestic issuers priced better than local sovereign debt as they were seen as less risky.



Why Issue Covered Bonds


Covered bond investors typically do not purchase RMBS, ABS or corporate debt.  Accordingly, the only access to this investor base for financial institution issuers is through covered bonds.  The benefit is two-fold.  First, it provides important diversification to the investor base and, second, the cost of funding tends to be lower than any other funding source available to the institution with the exception perhaps of its central bank.



The indirect cost, however, should not be ignored.  The assets in the cover pool remain on the balance sheet of the issuing institution.  That means the institution must allocate capital to the assets and bear 100% of the risk of loss on the assets. This creates a strong incentive to use high quality assets in the cover pool.



U.S. History of Covered Bonds


 Washington Mutual issued the first covered bond by a North American financial institution in September 2006 in an offering that was 4 times oversubscribed by European investors.  This was followed in early 2007 by an offering from Bank of America.  Due to regulatory and legal constraints and the lack of an enabling statute, these offerings utilized a costly and complex structure that is not usable in today's environment.  No U.S. financial institution has issued covered bonds since 2007.



However, non-U.S. issuers have found the U.S. market attractive because it has provided important investor diversification.  Offerings in the U.S. market to date have been in U.S. dollars.  The viability of the market depends on the currency swap rates for swapping U.S. dollar proceeds into an issuer's domestic currency.  In 2011, 2012 and part of 2013, the swap rates were very favorable for U.S. dollar issuance.  In late 2013 and 2014, swap rates favored issuance in Europe in euros.  Currently cross currency swap rates are closer to neutral.



European History of Covered Bonds


The history of the European covered bond market is dealt with in detail elsewhere.  See, e.g., the ECBC and Pfandbrief links on the Useful Links page.  The market provides the primary source for financing residential mortgage loans in Europe where no counterparts to Fannie Mae and Freddie Mac exist.  Current outstandings in the market exceed euro 3 trillion with maturities out to 15 years and in a few cases out to 50 years.  The market mostly continued to function throughout the financial crisis, providing  important liquidity in a troubled world.  Covered bonds are favored in Europe today because they avoid the "bail-in" risk that faces senior bonds.  They are also favored by regulators as an investment for banks.  Under current capital requirements, a "AAA" covered bond would attract no more than half the capital of senior debt from the same issuer.  



Primarily a 144A Market


Until the RBC offering in September 2012, all of the offerings of covered bonds in the U.S. market had been 144A offerings.  The advantage of 144A offerings is that the issuer does not have to have discussions with U.S. regulators and can move quickly to market.  The disadvantage to 144A offerings is that the securities are "restricted" securities and many investors have a limited capacity to purchase restricted securities.  These limitations affect pricing and the secondary market.



SEC Registration


SEC registration addresses both of these disadvantages.  First, SEC registered securities are not "restricted" securities and, therefore, investors are not restricted in their ability to buy them.  This brings more investors into the market and improves the secondary market.  Additionally, SEC registered securities are eligible for the bond indices, such as the Barclays Aggregate Bond Index.  This pushes index funds to purchase the bonds and provides important pricing information.  Finally, SEC registered securities are eligible for the FINRA TRACE Reporting System, which will disclose pricing on every secondary market trade  in the securities, providing important transparency.  All of these features will improve pricing for issuers in the primary offering. RBC offered the first SEC registered covered bonds in September 2012.



Second, RBC registered its covered bonds on Form F-3, a shelf registration form.  This allows RBC to register a large amount of securities that it may offer whenever market conditions are favorable.  With shelf registered covered bonds, RBC can decide to issue with as little as a few hours notice.





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News & Views




Updated: 5/30/2014








Recent Developments 




Well, we were hoping 2013 would be a big year for covered bond issuance in the U.S., but it hasn't turned out that way. Total covered bond issuance in the U.S. market through early December is only about $22 billion, a very disappointing year.  The total for 2012 was almost $44 billion. Many factors influenced this, but probably the biggest factor was CMHC, the new Canadian covered bond regulator.  It took much longer than anticipated for the Canadian banks  to be registered by CMHC.  As of November 1, CMHC had registered RBC, CIBC, BNS and NBC.  TD, BMO and CCDQ are still in process.  And it was mid-year before the first two banks, RBC and CIBC, were registered, so it was a late start to Canadian issuance.


Other influencing factors likely were the free money provided to U.K. banks by the Bank of England, deleveraging by European banks, cross currency swaps moving in favor of the euro and against the dollar and the focus on equity raising.  The net result was sharply diminished issuance of both ABS and covered bonds by European issuers.  The most dramatic impact probably was in the U.K where issuance of ABS and covered bonds was reported to be down almost 99% from the prior year.









CMHC Registered Covered Bonds


The appearance of covered bonds registered under the new Canadian covered bond legislation was a significant development.  RBC and CIBC were both registered on July 3.  In a flurry of activity, RBC promptly made a US$ SEC registered offering on July 16, followed by a euro offering off its UKLA-listed program on July 25, an Australian offering on August 7, another US$ SEC registered offering on September 24 and a euro offering on October 22.  CIBC did a euro offering off its UKLA-listed program on August 2 and an Australian offering on October 22.









U.S. Legislation


We also keep hoping that 2013 may see the adoption of covered bond legislation in the U.S.  The housing market is recovering, Fannie Mae and Freddie Mac are being wound down and the FDIC program that guaranteed unlimited amounts of deposits has ended leading to the withdrawal of significant amount of corporate and institutional funds from the banking system.  All of this suggests that banks will need to turn to the private market for funding the growing volume of new mortgage loans.  But Fannie Mae and Freddie Mac are being deflated slowly and the banks generally are in good cash positions.  So there has been little activity around U.S. covered bond legislation.  Both the Senate and the House are turning their attention to resolving Fannie Mae and Freddie Mac.  There are bills in each legislative house to address the GSEs.  The bill in the Senate, S.1217, has strong bi-partisan support and no covered bond provisions. The bill in the House, H.R. 2767, has only Republican support but does have covered bond provisions, which are very similar to those proposed last year.  The timetable for these bills is unpredictable, although the Senate Banking Committee has said that it wishes to act on S.1217 by year end.









FRB Eligibility


There is also an effort underway to have the Federal Reserve Board make covered bonds eligible at the discount window.  Under current Fed rules, only "Pfandbrief" and U.S. issued covered bonds are eligible (see the list here and here).  The senior debt of the issuers of covered bonds in the U.S. market is eligible at the Fed so long as it is rated at least BBB, but not the covered bonds of the same issuer even if rated AAA.  It would seem that a simple starting place would be to treat covered bonds the same as senior unsecured bonds of the same issuer.  Making covered bonds eligible at the discount window would add important liquidity for investors.  The U.S. Covered Bond Council submitted a letter to the FRB on February 1, 2013.  The FRB staff responded orally that the question was more complicated than the letter indicated.  It has been suggested that the FRB cannot move ahead with this until it resolves the Dodd-Frank task of removing rating agency ratings from all of its rules and regulations.  Eligibility at the discount window will be increasingly important as the U.S. market for covered bonds grows.  Lack of eligibility will tend to stifle market growth.








More News & Views . . . 





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About this site



Purpose


The purpose of the site is to promote the development of covered bonds in the United States, both as a market for bonds issued by non-U.S. institutions and as source of issuance from domestic U.S. issuers.


 Editor


15077Jerry Marlatt is the site editor and responsible for all content.  He can be reached at jmarlatt@mayerbrown.com or at jrmarlatt@gmail.com. He has been involved in more than $200 billion of covered bond offerings in Europe and the United States, starting with the first offering by a U.S. bank in September 2006 for Washington Mutual.  He completed the first-ever SEC registration statement for covered bonds on behalf of the Royal Bank of Canada covered bond program and the inaugural offering of bonds by RBC under that registration statement in September 2012.  See bio here.



Technology


 This website is managed by admin@us-covered-bonds.com. 




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Issues and Concerns




Updated: 11/28/2013





Discussed below are current concerns and issues that have been raised in connection with proposed U.S. covered bond legislation.  Also set out are responses to the issues and concerns, which do not purport to represent all views or be complete.  Comments and other views are welcome.




    
	
  • Cannibalizing Securitization.  Some commentators have raised the concern that if legislation for covered bonds were adopted in the U.S. it could cannibalize securitization, particularly mortgage securitization.  The comment was raised in a post-crisis environment in which no private sector mortgage securitization was occurring.  Even today, more than five years after the crisis, there is little private sector securitization of residential mortgage loans.
    • 





Response.  Investors in covered bonds generally do not purchase RMBS or other ABS.  Covered bond investors tend to purchase sovereign debt and agency debt and find covered bonds to present similar risks.  They are attracted by the dual recourse nature of covered bonds, the statutory framework for issuance and issuance by regulated financial institutions.  Covered bonds present no convexity risk, no complex class structures and generally are protected by high quality collateral.  At a conference in Barcelona before the crisis, HSBC, who was a heavy user of both RMBS and covered bonds, stated that the bank viewed RMBS and covered bonds as alternative means of financing, the choice of which for any particular financing was determined by a variety of market and regulatory factors. There is every reason to expect that RMBS and covered bonds would exist in the U.S. market also as viable alternative means of financing.


    
	
  • Cost to the Treasury.  The Congressional Budget Office has released an assessment of the reduced tax revenue to the U.S. Treasury under H.R.940 as a result of banks using covered bonds rather than RMBS to finance mortgage loans.  This loss is estimated to be about $500 million over ten years. The Joint Committee on Taxation sent a revenue estimate to the House Financial Services Committee.  David Camp, Chairman of the House Ways and Means Committee, sent a letter  transmitting the JCT revenue estimate and enclosing an amendment to H.R.940.   
    • 





Response.  One can quarrel with many of the CBO assumptions in this analysis, but perhaps the most misleading aspect of the conclusions is the failure to acknowledge that, as a result of a change by the FDIC in calculating the assessment for each bank to support the DIF from being based on deposits to being based on all liabilities of a bank, issuing covered bonds instead of securitizing will result in the FDIC collecting higher assessment fees. The amendments proposed by the Ways and Means Committee do not appear to do any harm to H.R.940 as a covered bond statute.

 

    
	
  • Encumbrance of Assets.  Among the concerns on covered bonds raised by the Federal Deposit Insurance Corporation is a concern that cover pools for covered bonds will tend to consume the better assets of a bank, leaving the FDIC with poorer quality assets to satisfy the claims of depositors and increasing the risk to the deposit insurance fund.  The FDIC has also expressed a concern that over-collateralization levels can become larger as a bank's credit position deteriorates.  They point to the nearly 50% over-collaterlization in the Washington Mutual covered bond program shortly before the FDIC took over the bank.  The FDIC also points to high over-collateralization in some European covered bond programs.
    • 





Response.  First, the higher levels of over-collateralization seen in some European covered bond programs are perhaps a misconception.  These levels generally  are due to structural aspects of the mortgage business in some jurisdictions which result in a bank's entire portfolio being available to repay covered bonds.  Second, many other forms of bank financing encumber assets, including central bank financing, repo financing, securitization, FHLB borrowings and various types of collateralized derivatives.  To focus only on covered bonds tends as a policy matter to encourage the other forms of financing over covered bonds, which does not seem to be a wise policy choice.  See a more complete analysis at A Battle over Collateral.




In the case of the Washington Mutual program, the high over-collateralization level arose from the peculiar structure used for that program.  Under the terms of the program, in the event of the insolvency of the issuer the entire mortgage pool was to be liquidated and the proceeds were to be placed in a guaranteed investment contract.  The proposed legislation would not conduct a fire sale of the entire cover pool at insolvency.  Instead the assets in the cover pool would be retained in a separate estate and administered to pay the bonds in accordance with their terms.




The former general counsel of the FDIC has reported that prior to his departure the agency had agreed internally that the risk from encumbrance would be ameliorated by an 8% cap on issuance of bonds.  This would certainly be an acceptable starting place for U.S. banks issuing covered bonds if it could be agreed to.


    
	
  • Loss of Repudiation Power.  The FDIC has complained that under the proposed legislation it would lose its traditional power to repudiate the obligations of a bank in resolving the receivership of a failed bank in the case of covered bonds.  Instead, the cover pool would be separated from the failed institution and adminstered to continue making payments on the bonds.
    • 





Response.  The FDIC has already lost its repudiation power in connections with several other means of financing bank assets: repurchase agreements, FHLB borrowings, central bank financings, securitizations and collateralized derivatives.


    
	
  •  Only the Largest Banks Benefit.  One of the criticisms of covered bonds is that they would only benefit large, money center banks.
    • 





Response.  The potential benefit to smaller and regional banks seems to be largely overlooked.  Covered bonds would permit financing of commercial mortgage loans and loans to municipalities, assets for which smaller and regional banks do not currently have capital markets access.




Moreover, the European jurisdiction with the most similar banking system in terms of number of banks is Germany.  Germany has more that 2200 banks.  It is the smaller banks in Germany that provide the bulk of the residential mortgage financing and they fund that activity in the covered bond market.  Germany has a two-tier covered bond market.  The smaller banks finance in the domestic covered bond market, which does not attract international investors but which nevertheless continued to provide funds throughout the financial crisis.  The purchasers in the market tend to be other local banks, local insurance companies, smaller retirement funds and other local investors who are able to focus on regional institutions.  There is reason to expect a similar market to develop in the U.S.


    
	
  • Adversely Affect the FHLBs.  Several of the Federal Home Loan Banks have raised the concern that covered bonds could damage the FHLB system by reducing usage of FHLB borrowings and that as a result the FHLBs might not be able to provide important support and liquidity during the next financial crisis.
    • 





Response.  This argument seems to ignore the effect on the FHLBs of securitizations and the support provided by Fannie Mae and Freddie Mac for mortgage loans.  Although some institutions relied heavily on FHLB borrowings to finance their mortgage lending prior to the financial crisis, there was extensive use of securitization and the GSEs; nevertheless, the FHLBs moved rapidly to inject massive liquidity into the banking system as the crisis developed.  While it is possible that reliance on covered bonds could reduce borrowings from the FHLBs, it is also possible that instead the reduction would, at least in part, be a reduction in RMBS issuance or GSE financings.  Moreover, there is nothing to suggest that heavy reliance on the FHLBs prior to a crisis is an esential predicate to the ability of the FHLBs to provide important liquidity as a crisis develops.




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Concerns about Legislation




Updated: 11/28/2013






[columns count="2" gap="3em"]

Discussed below are current concerns and issues that have been raised in connection with proposed U.S. covered bond legislation.  Also set out are responses to the issues and concerns, which do not purport to represent all views or be complete.  Comments and other views are welcome.




    
	
  • Cannibalizing Securitization.  Some commentators have raised the concern that if legislation for covered bonds were adopted in the U.S. it could cannibalize securitization, particularly mortgage securitization.  The comment was raised in a post-crisis environment in which no private sector mortgage securitization was occurring.  Even today, more than five years after the crisis, there is little private sector securitization of residential mortgage loans.
    • 




 
Response.  Investors in covered bonds generally do not purchase RMBS or other ABS.  Covered bond investors tend to purchase sovereign debt and agency debt and find covered bonds to present similar risks.  They are attracted by the dual recourse nature of covered bonds, the statutory framework for issuance and issuance by regulated financial institutions.  Covered bonds present no convexity risk, no complex class structures and generally are protected by high quality collateral.  At a conference in Barcelona before the crisis, HSBC, who was a heavy user of both RMBS and covered bonds, stated that the bank viewed RMBS and covered bonds as alternative means of financing, the choice of which for any particular financing was determined by a variety of market and regulatory factors. There is every reason to expect that RMBS and covered bonds would exist in the U.S. market also as viable alternative means of financing.

 

    
	
  • Cost to the Treasury.  The Congressional Budget Office has released an assessment of the reduced tax revenue to the U.S. Treasury under H.R.940 as a result of banks using covered bonds rather than RMBS to finance mortgage loans.  This loss is estimated to be about $500 million over ten years. The Joint Committee on Taxation sent a revenue estimate to the House Financial Services Committee.  David Camp, Chairman of the House Ways and Means Committee, sent a letter  transmitting the JCT revenue estimate and enclosing an amendment to H.R.940.   
    • 





Response.  One can quarrel with many of the CBO assumptions in this analysis, but perhaps the most misleading aspect of the conclusions is the failure to acknowledge that, as a result of a change by the FDIC in calculating the assessment for each bank to support the DIF from being based on deposits to being based on all liabilities of a bank, issuing covered bonds instead of securitizing will result in the FDIC collecting higher assessment fees. The amendments proposed by the Ways and Means Committee do not appear to do any harm to H.R.940 as a covered bond statute.

 

    
	
  • Encumbrance of Assets.  Among the concerns on covered bonds raised by the Federal Deposit Insurance Corporation is a concern that cover pools for covered bonds will tend to consume the better assets of a bank, leaving the FDIC with poorer quality assets to satisfy the claims of depositors and increasing the risk to the deposit insurance fund.  The FDIC has also expressed a concern that over-collateralization levels can become larger as a bank's credit position deteriorates.  They point to the nearly 50% over-collaterlization in the Washington Mutual covered bond program shortly before the FDIC took over the bank.  The FDIC also points to high over-collateralization in some European covered bond programs.
    • 





Response.  First, the higher levels of over-collateralization seen in some European covered bond programs are perhaps a misconception.  These levels generally  are due to structural aspects of the mortgage business in some jurisdictions which result in a bank's entire portfolio being available to repay covered bonds.  Second, many other forms of bank financing encumber assets, including central bank financing, repo financing, securitization, FHLB borrowings and various types of collateralized derivatives.  To focus only on covered bonds tends as a policy matter to encourage the other forms of financing over covered bonds, which does not seem to be a wise policy choice.  See a more complete analysis at A Battle over Collateral.




In the case of the Washington Mutual program, the high over-collateralization level arose from the peculiar structure used for that program.  Under the terms of the program, in the event of the insolvency of the issuer the entire mortgage pool was to be liquidated and the proceeds were to be placed in a guaranteed investment contract.  The proposed legislation would not conduct a fire sale of the entire cover pool at insolvency.  Instead the assets in the cover pool would be retained in a separate estate and administered to pay the bonds in accordance with their terms.




The former general counsel of the FDIC has reported that prior to his departure the agency had agreed internally that the risk from encumbrance would be ameliorated by an 8% cap on issuance of bonds.  This would certainly be an acceptable starting place for U.S. banks issuing covered bonds if it could be agreed to.


    
	
  • Loss of Repudiation Power.  The FDIC has complained that under the proposed legislation it would lose its traditional power to repudiate the obligations of a bank in resolving the receivership of a failed bank in the case of covered bonds.  Instead, the cover pool would be separated from the failed institution and adminstered to continue making payments on the bonds.
    • 





Response.  The FDIC has already lost its repudiation power in connections with several other means of financing bank assets: repurchase agreements, FHLB borrowings, central bank financings, securitizations and collateralized derivatives.


    
	
  •  Only the Largest Banks Benefit.  One of the criticisms of covered bonds is that they would only benefit large, money center banks.
    • 





Response.  The potential benefit to smaller and regional banks seems to be largely overlooked.  Covered bonds would permit financing of commercial mortgage loans and loans to municipalities, assets for which smaller and regional banks do not currently have capital markets access.




Moreover, the European jurisdiction with the most similar banking system in terms of number of banks is Germany.  Germany has more that 2200 banks.  It is the smaller banks in Germany that provide the bulk of the residential mortgage financing and they fund that activity in the covered bond market.  Germany has a two-tier covered bond market.  The smaller banks finance in the domestic covered bond market, which does not attract international investors but which nevertheless continued to provide funds throughout the financial crisis.  The purchasers in the market tend to be other local banks, local insurance companies, smaller retirement funds and other local investors who are able to focus on regional institutions.  There is reason to expect a similar market to develop in the U.S.


    
	
  • Adversely Affect the FHLBs.  Several of the Federal Home Loan Banks have raised the concern that covered bonds could damage the FHLB system by reducing usage of FHLB borrowings and that as a result the FHLBs might not be able to provide important support and liquidity during the next financial crisis.
    • 





Response.  This argument seems to ignore the effect on the FHLBs of securitizations and the support provided by Fannie Mae and Freddie Mac for mortgage loans.  Although some institutions relied heavily on FHLB borrowings to finance their mortgage lending prior to the financial crisis, there was extensive use of securitization and the GSEs; nevertheless, the FHLBs moved rapidly to inject massive liquidity into the banking system as the crisis developed.  While it is possible that reliance on covered bonds could reduce borrowings from the FHLBs, it is also possible that instead the reduction would, at least in part, be a reduction in RMBS issuance or GSE financings.  Moreover, there is nothing to suggest that heavy reliance on the FHLBs prior to a crisis is an esential predicate to the ability of the FHLBs to provide important liquidity as a crisis develops.

[/columns]



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U.S. Legislation




Updated: 7/21/2014







The chronology of legislative attempts to enact covered bond legislation in the U.S. is well chronicled by Morrison & Forester .  It seems to be an endless process.  We are now beginning the sixth year of working towards covered bond legislation.  What makes it so difficult you might ask?  Other countries seem to adopt legislation in a couple of years.  The answer to why lies in the long history of government involvement in housing finance in the U.S.  



Ever since the Depression, the government has played an extensive and active role in the residential mortgage market through Fannie Mae, Ginnie Mae, Freddie Mac, FHA, FHMA, the FHLBs and a variety of other government programs and other government assistance, such as treating interest payments on residential mortgage loans as deductible for federal income tax purposes.  Since the financial crisis, the government has financed about 95% of new residential mortgage loans and for a period while prices in the U.S. housing market continued to fall there was a serious concern that any reduction in government support could lead to a complete collapse in housing prices.  In this environment, there was little incentive to explore private sector alternatives.



In the last year, conditions in the housing market have changed and prices have once again begun to rise.  We are now entering a period when we can contemplate changing the government's role in housing finance and how best to reduce the government's exposure to losses, a discussion that is sure to be colored by the nearly $150 billion in losses experienced through Fannie Mae and Freddie Mac.  Part of the answer will clearly involve incentives for substantial private sector participation in housing finance.  A rational design would not rely on a single type of private sector mortgage financing, but rather on alternatives that are not fully correlated, so that market access to financing remains open in times of financial stress.



Covered bonds are a sensible alternative to RMBS and the GSEs.  Covered bond investors tend not to buy RMBS or GSE guaranteed MBS.  The advantage of a distinct investor base provides important resiliency to housing finance in difficult times as evidenced by the continued availability of covered bond financing in Europe in the aftermath of the crisis while RMBS financing has struggled to recover.  Moreover, covered bonds are a relatively simple instrument and so do not present complex regulatory challenges.



Elements of Legislation


As noted elsewhere, H.R.2767 includes covered bond provisions that are similar to the provisions in bills introduced in 2011 (S.1835 and H.R.940).  These bills contemplate a statutory scheme that would be familiar to many continental European investors: covered bonds would be issued in an 'integrated structure' with assets in the cover pool 'ring fenced' on the issuer's balance sheet.  Failure of the issuer would result in separately administering the cover pool to pay the outstanding covered bonds as scheduled through their maturities, very similar, for example, to the German Pfandbrief structure. See links to legislation at U.S. Legislative Links





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2023-01-12postSite//2020/03/22/covered-bonds-flight-to-quality/Covered Bonds - Flight to Quality
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