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Covered bonds: UK banks gain parity

The FSA took a couple of years but the UK regulator has finally accepted the concept of covered bonds; the Netherlands will be next.

The Financial Services Authority’s statement that it is ready to introduce a regulatory framework for UK covered bonds has met with widespread approval and relief from market participants [see FSA takes the covers off, February issue]. The announcement, made at the European Covered Bond Council’s meeting on February 7, ends a two-year period when UK borrowers operated at a disadvantage to many of their continental European competitors.

Good regulation

“We view the introduction of a covered bond regime that is compliant with EU legislation as consistent with our principles of good regulation,” says the FSA’s Paul Sharma, its head of prudential standards.

Consultations are due to be completed in the third quarter of 2006; the FSA will announce the final rules at the start of 2007. The FSA has created a covered bond standing group – a pre-consultation forum that will look at the various issues resulting from the mooted framework. Representing intermediaries on the standing group are ABN Amro, Barclays, Citigroup, Deutsche Bank and Royal Bank of Scotland; the borrower community is represented by Abbey, HBOS and Nationwide.

Significant change

“This change is highly significant. First and foremost, this will mean that UK covered bonds receive a 10% risk weighting, as will covered bonds from other jurisdictions sold to UK investors,” says Tim Skeet, managing director of financial institutions origination at ABN Amro.

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