Uncovering covered bonds: Should covered bonds be part of your funding strategies?

The markets for covered bonds are rapidly developing in Asia, in particular Australia, and in the US. This is because of many factors, including:

  • legislative changes that have happened in Asia and are imminent in the US;
  • increased liquidity pressures facing banks, including the Basel III requirements;
  • limited availability of long term funding;
  • increased swap costs for pre-payable securities; and
  • changes in investors’ appetite for traditional asset-backed securitisation products, and the returns required to compensate for holding them.

Potential issuers outside of Europe now need to evaluate whether covered bonds should be part of their future funding strategies.

However, banks should approach covered bonds with caution. Covered bonds may help with a bank’s liquidity ratios, but they do not reduce risk-weighted assets or the leverage ratios. With a growing proportion of the balance sheet encumbered, what may be a solution for liquidity, can become a problem with leverage and capital.

The potential benefits for covered bond programs need to be carefully evaluated individually, in context of the respective regulatory framework governing the business.

Download Uncovering covered bonds for a comprehensive overview of covered bonds, including the benefits and for issuers and investors, how they compare with other types of long term funding, the regulatory environments in Europe, Asia, the US and Canada, the impact of other regulations and how you can set up a covered bond programme.

PwC can help you decide if a covered bond programme could improve your businesses’ fund raising. Give us a call to find out more.