Italian downgrades raise pass-through profile

The covered bond ratings of Banca Popolare di Milano and Banca Carige are likely to be downgraded to junk. This will lead to a prohibitive rise in the bonds’ capital consumption, lowering the absolute return and increasing the risk of forced selling. This will be immensely frustrating for investors, given the high quality collateral and regulatory support. The move may highlight the merits of pass-through structures.