EUROWEEK: Asset encumbrance has been grabbing the headlines or a while now but I’m not sure it’s such a negative factor from a covered bond investors’ perspective is it?
Andreas Denger, Munich Ergo Asset Management: It is only a problem insofar as there could be rating consequences. If a bank’s senior unsecured debt is downgraded due to the rating methodology then covered bonds might follow. But in light of bail-in rules, rating agencies should question whether the senior unsecured rating link needs to be so closely correlated or whether there is a case for increasing the notching span from senior unsecured to covered bonds.
Prokes, BlackRock: It doesn’t really matter from a senior bondholder’s perspective whether a bank has €100bn of unencumbered mortgages on its balance sheet or if it has €100bn in its covered bond programme. If there’s a loss it will get allocated in the waterfall starting with equity, subordinate debt and then senior unsecured.
An investor of a bail-in-able instrument should not necessarily be negatively impacted just because somebody has a priority claim on certain pool of assets — unless we speak about a good bank-bad bank split. Whatever loss was created by any of the assets on the balance sheet of the bank, its bail-in-able instruments are liable for. Period.
Eichert, CA-CIB: Encumbrance is a problem for banks because it reduces their flexibility. We’ve seen hard issuance limits adopted in new markets while in Nordic countries where discussions have been taking place they’ve turned away from imposing hard limits. From an investors’ perspective encumbrance isn’t a major problem, the main thing that would happen is that issuance becomes restricted.
Juhasz, World Bank: It’s fair for regulators to have a soft limit of 20% of the value of assets on a bank’s balance sheet, or opt for a case-by-case approach, but I would not be happy to see a strict hard limit in the law because it’s less flexible and therefore harder to change.
Heberlein, Fitch: We recently published a study that for the first time looked at encumbrance versus all of a bank’s assets, while previously we were looking only at covered bonds in proportion to its total liabilities. We found that 19 banks in our sample of 135 had a cover pool representing more than 50% of the total balance sheet and six were above the 70% mark. But nearly all of these highly encumbered banks were from the Nordic countries where covered bonds play a much bigger role in their business models.