EUROWEEK: In what way are proposed covered bond regulations affecting the market?
Ralf Burmeister, Deutsche Asset & Wealth Management: Solvency II and CRD IV are causing a regulatory-induced rise in demand for liquid and highly liquid assets from banks and insurance firms alike, but there can only be one price for one bond which must be paid by each and every investor. But we have to wait for the final wording and the way in which national authorities implement the EU guidelines, which may therefore justify a case-by-case approach to different countries.
Florian Eichert, Crédit Agricole CIB: It will depend on what the European Banking Authority comes up with. I think their ideal end case would be an ECB repo eligible database where they have a particular treatment and a particular haircut next to each bond.
Attila Juhasz, World Bank: Covered bonds benefit greatly from proposed regulations and have an advantage versus the other asset classes. But I do see some risks in terms of the regulatory rating thresholds which are set as double-A minus. It means we will see a two-tier universe. The risk is that some investors move out of lower rated entities to buy triple-A to double-A rated bonds which may in turn squeeze prices higher.
Eichert, CA-CIB: Double-A minus is unlikely to be the material rating threshold. It could be set at triple-B minus, or there could be room for national discretion with, let’s say, Spanish banks being allowed to hold more lower rated Cédulas, while German banks are made to comply with a higher minimum rating threshold.
It would be challenging to force a Spanish bank to pile into high rated French or Nordic covered bonds as this may mean they’re locking in negative margins which in the long run would hurt their capital base. I’m also pretty sure the EBA will take maturities into consideration. At the moment the Basel text merely mentions a flat haircut of 15% on all covered bonds rated above double-A minus.
Mariano Goldfischer, CA-CIB: One of the most positive effects of regulation is the low capital charge that covered bonds attract. Bank treasuries have an excess of cash these days, which means they are more likely to favour the covered bond asset class vis-à-vis unsecured and other lower quality paper.
Joaquin Cortazar, BBVA Asset Management: We also have the opinion that CRD IV will be very beneficial for us in terms of the capital we will need to hold against covered bonds. But I would like to see a better capital treatment for MBS in which we also own a substantial portfolio.