EUROWEEK: Covered bonds are excluded from bail in, but there still seems to be a question over the residual unsecured claim and voluntary collateral?
Eichert, CA-CIB: Covered bonds are one of the only instruments where the notional claim is excluded from a bank’s resolution but there’s some variation to the wording of the proposals. Some versions say covered bonds, including all voluntary overcollateralisation (OC) and derivatives should be excluded from bail-in. Others say that only the collateralised claim is safe and anything in excess of that could be taken away.
Juhasz, World Bank: My impression is that countries where the covered bond market is traditionally a very important funding market, such as Germany or France, will be keep covered bonds completely out of the bail-in resolution. But others where there is less of a history such as the UK may exercise more discretion when it comes to the residual unsecured claim and excess OC, so we will pay a lot of attention to this.
Hélène Heberlein, Fitch Ratings: Some countries like Germany already have restructuring laws that explicitly refer to covered bonds but others such as Spain do not mention covered bonds. We can be fairly certain that committed collateral will be safe but it remains to be seen what happens to excess collateral.
There is also some question over the residual unsecured claim against the bankruptcy estate in case the covered bond collateral isn’t sufficient to redeem all investors. This in its credit analysis of covered bonds Fitch only looks at the cover pool and does not give credit to unsecured claim.
Yvan Lavastre, Caisse de Dépôts: When a bank is close to failure and where reputation or rating risks are less important, voluntary OC currently available in cover pools could be potentially reduced to the legal minimum. Unencumbered assets that are not included in the cover pool are valued on an accounting basis which might differ from their market value depending on their quality and/or liquidity.
Eichert, CA-CIB: The bank CFO is liable for protecting the unsecured investors and may feel compelled to reduce the OC to the legal or the contractually committed level before a bail-in becomes relevant. The important thing from an investor’s perspective is that the covered bond programme is not moved to the bad bank. Provided the programme remains in the viable entity of the bank after its resolution then any question about claims over the excess OC are almost irrelevant because you’re still with the part of the bank that’s writing business.
Burmeister, DeAWM: Bail-in has the aim and the purpose of preserving something within the bank which is worth being supported. So I would assume a residential mortgage-backed covered bond is something that’s worth being supported and would be included in the better part of the bank — in which case it’s rather academic to talk about the potential bail-in of the residual senior unsecured claim.
If OC goes down following a bank’s resolution, that’s the price covered bond investors have to pay to get a healthier restructured issuer with a cleaner balance sheet. The introduction of Sareb in Spain didn’t automatically lead to a negative impact on the cover pools. OC went down, but asset quality improved so it’s give and take.
Jozef Prokes, BlackRock: The wording is very interesting because they say the secure liabilities including covered bonds are permanently excluded from bail-in, which sounds like the whole thing is out. But we’ve had a lot of rumours, discussions, push-backs, in terms of what happens to voluntary overcollateralisation and the residual senior claim. These two topics are still subject to further clarification, but the document reads in a way that suggests there is no benefit to messing with either of those two aspects.