It was Groucho Marx who said that he didn’t want to belong to any club that would accept people like him as a member.
It’s doubtful that the Label Foundation, the body that awards covered bonds the label kitemark, would have taken in Mr Marx. But he might have appreciated the Foundation’s recent efforts to make its club a little more exclusive.
Until last week, membership of the label was laid out in the Covered Bond Label Convention which highlights legislative safeguards and other intrinsic features such as the dual claim. More or less any established covered bond issuer that applied for the label and paid the fee was accepted.
But, the foundation is tightening its definition, aligning it with Article 129 of the Capital Requirements Regulation (CRR) from January 1, 2014, with a one year phase-in period.
The CRR ordains that only public sector loans, shipping loans and mortgages with a loan to value ratio (LTV) of up to 80% are permissible cover pool assets.
Esoteric bonds such as aircraft Pfandbriefe and SME backed covered bonds never qualified for the Label. But the new definition may now mean that Denmark's Realkreditobligationer and Luxembourg's Lettres de Gage could be removed, unless their national laws are modified by the end of next year.
This is because their laws allow for a broader range of assets than that stipulated in the CRR. There are also a couple of Dutch programmes that could be excluded, such as NIBC’s legacy programme and Achmea Hypo’s covered bond programme, which both exceed CRR’s LTV threshold.
However, while the Label Foundation’s new definitions will no doubt help maintain the preferential regulatory status of the covered bond product, they do not tackle the most important issue for investors — standardised definitions of collateral across national boundaries such as how to calculate an LTV, what a non-performing loan is and how over-collateralisation is measured.
While standardisation might be outside of the Foundation’s remit, getting issuers to agree common terms on a pan-European basis will enable investors to compare all European transactions on a like-for-like basis. This will allow them to make clear relative value decisions, thereby rewarding those issuers that have made the effort to sign up to standardisation.
Standardisation is likely to please policymakers too. The European Commission’s Green paper for long term financing suggests that greater harmonised transparency and disclosure standards could spur covered bonds as a long-term financing vehicle for the real European economy.
The Canadian authorities have already raised their game by requiring issuers to post monthly reports with their regulator which provide comparable, in-depth information on programme structures and collateral pool.
Canada is not in Europe of course, and it will be harder to agree terms across the different nations of the common currency. But if the European covered bond market wants to maintain its superiority and preferential treatment, it would be well advised to put in the hard work of standardisation and transparency.