Will mutuals issue mutually?
It is not only the big UK clearing banks that are feverishly assessing the pros and cons of covered bond issuance; building societies, the UK’s specialist mutually owned mortgage banks, are also expected to tap the market in future. Nationwide was first out of the gate (unsurprisingly, given the size of its mortgage book) with a €2 billion deal in December last year. Building societies have been unable to tap the RMBS market because it has proved too difficult to structure deals around their membership rights. They would therefore be expected to leap into covered bonds as a valuable source of cheap funding.
Size is an issue. “Institutions do need to be a certain minimum size – unless you have the potential for A5 billion of funding a covered bond programme is not for you,” says one banker. Several building societies have been discussing whether a group covered bond structure along the lines of the Spanish TDA and AyT models could work in the UK, as this would address the concerns of the smaller building societies that could only as individuals issue in volumes below £200 million to £300 million ($518 million).