Canada Covered Bonds To Be Usable in EU-Bank Liquidity Buffers

Regulators are poised to allow European Union banks to use Canadian covered bonds in liquidity buffers, potentially boosting demand for the mortgage-backed debt.

Wojciech Zielonka, senior vice president of capital markets at Canada Mortgage and Housing Corp., the federal agency that oversees the country’s covered bond-market registry, said the securities will be designated as liquid assets in Europe when rules are finalized.

“It appears that they will be qualified as a liquid asset under the European implementation of the liquidity coverage ratio as a Level 2A asset,” Zielonka said at the Bloomberg Canadian fixed-income conference in New York. “That’s very good news for the Canadian issuers.”

The EU plans an Oct. 1, 2015 start date for implementing global rules set by the Basel Committee on Banking Supervision for banks to hold a minimum amount of assets that would be easy to sell in a crisis, according to a European Commission document obtained by Bloomberg News in July. Covered bonds are issued by financial institutions and are typically backed by pools of residential mortgages.

In addition to delaying implementation, the EU has been relaxing parts of the Basel rule, including giving banks more scope to use covered bonds to fill their required liquidity buffers and expanding the range of asset-backed debt that lenders can use to meet the so-called liquidity coverage ratio, or LCR. The U.S. Federal Reserve has toughened some elements of the measure.

Canadian banks started selling covered bonds in 2007, tapping a market that dates back more than 240 years in Europe. CMHC oversees a registry that requires covered-bond issuers to disclose information about the debt, such as who is paying off the underlying mortgages and who is guaranteeing the securities against default.

Relative yields on the nation’s covered bonds issued in U.S. dollars remain the lowest among worldwide peers at an average 26 basis points, according to Bank of America Merrill Lynch index data. Australian and euro-area lenders pay 36 basis points and 56 basis points.

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