A year after it dismayed UK issuers by suggesting a 4% guideline for assessing covered bond issuance, the Financial Services Authority has given covered bonds its blessing.
Managing risk
In a letter to the British Bankers' Association on August 4, the FSA says it would still expect issuers to tell it if their covered bond issuance exceeded 4% of total assets, but most banks would only have to increase their individual capital ratios (ICRs) when issuance reached 20%.
"The ability to access the securitization and the covered bond markets is a significant extra tool for banks to manage liquidity risk, including stress liquidity risk," Paul Sharma, head of the FSA's prudential standards department, says, before adding that this flexibility is only available to regular issuers.
| UK covered bond issuance relative to total assets | |||
| HBOS | 740 | 12.5 | 1.7% |
| Bradford & Bingley | 57 | 2 | 3.5% |
| Northern Rock | 105 | 3.5 | 3.3% |
| Abbey National | 277 | 2 | 0.7% |
From a depositor's point of view, covered bond issuance boosts liquidity and so reduces an issuer's probability of default.