Europeans push covereds to Asia
* Europeans pitch covered bonds for Basel III requirements
* Singapore, HK banks have shortage of government bonds
* Asian regulators say covereds are not liquid enough
By Christopher Langner
Oct 24 (IFR) - Some of Europe's top covered bond issuers have been quietly lobbying regulators in Singapore and Hong Kong to get them to accept their mortgage-backed securities as level 1 assets for liquidity coverage ratio accounting under Basel III. Initial reaction to the idea, however, has been negative.
The suggestion is not completely unwarranted, though. Both jurisdictions are expected to start rolling out Basel III regulations as early as next year and the amount of government securities available in both markets will probably not be enough for banks to have sufficient level 1 assets to meet the new liquidity requirements.
Hong Kong and Singapore are not alone in grappling with that shortcoming. In fact, across the whole industry, the Basel Committee estimates that there will be a shortfall of up to US$3trn of the liquid assets required to meet liquidity coverage and net stable funding ratios. Some jurisdictions have argued that an open line of credit to the central bank will suffice as a substitute for enough liquid government debt.
But issuers of highly liquid covered bonds, such as the Nordic banks, are nudging regulators around the world and suggesting that their covered bonds could be used instead. The lobbying took an official turn in the first week of October, when the European Covered Bond Council (ECBC) published a position paper arguing that Nordic covered bonds met all the criteria required to be level 1 liquid assets so regulators should consider them as such.
"The ECBC strongly advocates for the inclusion of covered bonds in the definition of transferable assets of extremely high liquidity and quality," the industry association stated right at the start of the 25-page document.
For their part, the Nordic banks were said to have told regulators in Hong Kong and Singapore that they would even be willing to consider issuing local currency bonds if banks could hold the paper for liquidity purposes. The idea, however, does not seem to have gained much traction so far.
At a conference of the International Swaps and Derivatives Association in Singapore on Monday, Michael Syn, the head of derivatives for the Singapore Exchange, was asked if the exchange would consider covered bonds for collateral purposes in its contracts - something that would amount to an endorsement of their value as liquid assets.
"We need our clearing house to have a flight-to-quality halo around it - any time there is a crisis, money has to come our way," he answered. "[Covered bonds] aren't compatible with flight to quality and they are unlikely to be used [at this stage]."
When Syn answered the question, Loo Siew Yee, executive director of the capital markets department at the Monetary Authority of Singapore (MAS), was participating on the same panel. She had refused to answer the same question, leaving it to Syn, but the audience took her quiet acquiescence as an endorsement of Syn's position.
Singapore has long dabbled with the idea of covered bonds but has yet to provide a full regulatory framework even for its own banks to issue them. Earlier this year, the MAS invited responses to a consultation paper on how to enable local banks to issue covered bonds. The final details were being hammered down and some of the lenders are weighing the possibility of issuing under that format.
But that is as far as the MAS will go, it seems. Singapore is not alone in its scepticism. Asked if covered bonds should become level 1 assets, a regulator in New Zealand said that they were not liquid enough for that. "When the crisis hits, covered bonds start trading like credit again," he said, emphasising their lack of liquidity outside Europe.
The ECBC position paper used Danish covered bonds as an example and went to great lengths to point out that covered bonds from some of Europe's best issuers actually behaved like liquid assets during the past crises. A funding manager in Europe that is a big issuer of covered bonds also said that Greece, Italy and Spain showed that even government securities could become illiquid in a severe crisis.
However, it seems unlikely the idea will fly. And even if it does gain strength in Europe, Asian regulators are unlikely to start taking them as collateral or even less as liquid assets for Basel III purposes.
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