Euro

The latest Basel proposals regarding the net stable funding ratio (NSFR) have been relaxed, in a move possibly motivated by the political will to ensure lending to the real economy, said Standard and Poor’s in a report published on Monday. Bankers said that covered bonds can provide a useful tool for banks to extend the average duration of their liabilities, helping to meet their NSFR target.

The European Commission (EC) may come to a compromise solution in regard to how covered bonds are classified in the liquidity coverage requirement (LCR). Banks may be able to invest up to 70% of their liquidity buffers in covered bonds, up from a maximum of 40% in current proposals, said DZ Bank research.

Capital requirement regulations (CRR) governing the level of transparency that must be provided by issuers to investors is not well defined and is being exploited, said LBBW research.

On Thursday UBS came to market with its first covered bond since January 2012, but the third Swiss deal of the year following Credit Suisse, which issued in January and March. UBS aimed to capitalise on market momentum created by the Lloyds trade on Wednesday which was the same size, tenor and rating.

Covered bonds that can be bought in size and with a triple digit spread over mid swaps are a rare commodity, so it was perhaps unsurprising that Banca Monte dei Paschi di Siena (MPS) attracted one of the highest oversubscriptions of any covered bond of this size this year. But twinned with its recent senior issuance, the deal shows that the bank can easily access to capital markets, which can only help underpin confidence ahead of its capital raise.

A bigger bank is not necessarily the same as a stronger bank, which is why the Bank of Italy’s draft proposal redefining which borrowers can issue covered bonds should be applauded.

Caisse Francaise de Financement Local (Caffil) mandated and priced a €500m tap of its October 2028 on Wednesday. The benchmark sized increase, which doubled the size of the transaction, was driven by reverse enquiry, and despite lopping a quarter off the spread versus where original deal came, it was comfortably oversubscribed with high quality real money demand.

On Wednesday Lloyds Bank issued its first euro issuance since January 2012, and the UK’s first euro benchmark deal of 2014. The €1bn no-grow seven year transaction was both the tightest and most oversubscribed UK deal issued in the last three years.

On Monday, Aktia Bank launched and priced its second euro covered bond benchmark. Despite some investor concerns over Finland’s relationship with Russia that were encountered during the investor roadshow, the deal exceeded the issuer’s pricing and distribution expectations.

The South Korean cabinet approved the country’s covered bond law on Tuesday, after it was passed by Parliament in December 2013. Five issuers with €921bn of assets on their balance sheets could issue up to €70bn of covered bonds after the law comes into effect on April 15.

A flurry of issuance from banks has led to a positive outlook for the Italian covered bond market, as financial institutions — old and new — move away from central bank liquidity.

Covered bonds earn a preferential risk weight, even though they are not subject to the same tight standards of transparency and harmonised regulatory frameworks as ABS, said the European Central Bank’s executive board member Yves Mersch on Monday.