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Regulatory haze obscures UK Pfandbrief issues

HBOS has become the first UK issuer to sell covered bonds in Europe, in a deal that looks set to create a new market. Will that promise be undone by regulators unsure of the law on risk weightings for such deals? Michael Evans reports

A deal by HBOS last month signalled the birth of a UK market in covered bonds. Now all eyes are on regulators to clear up confusion about the capital that bank investors should hold against investments in these deals.

The €3 billion issue is the first time a UK bank has tapped demand for covered bonds from institutional investors in Europe that have been buying German Pfandbriefe for years. But the bond is risk weighted at 20% - twice the figure for an equivalent German deal - so banks that buy it must hold $1.6 million in reserve for every $100 million invested.

The lawyers that put the HBOS issue together say regulators should have granted it the same risk weighting used elsewhere in Europe. But even they admit there is no legal basis for this because of uncertainty about European Commission rules.

The UK's Financial Services Authority says it stands by its weighting, but might change it in future. "If more banks start to use this structure and it becomes effectively a UK Pfandbrief, it is possible we'll look at the risk weightings. But we'd have to do so in the context of the new Basle Accord," says FSA spokesman David Eacott.

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