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Bank (issuer) Other assets Other Insol- Other assets Other Insol-
liabilities + vency liabilities + vency
equity Adminis- equity Adminis-
Other assets Other trator trator
liabilities +
equity Separation Separation
No default. Payments are made as scheduled Default. Payments have stopped, investors receive the recoveries
research.ca-cib.com
Crédit Agricole Corporate and Investment Bank is authorised by the Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI) and
supervised by the Commission Bancaire in France and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by
the Financial Services Authority are available from us on request.
Credit Focus
Issue
Security
Investor
Strengths:
z Covered bond investors have a residual claim on the remaining assets of the
bank pari passu to senior unsecured creditors should the cover pool not be
sufficient to cover all claims
Main challenges:
z Clear segregation of cover pool assets on balance sheet
z Clear separation of cover pool assets plus covered bonds post insolvency of
the issuer
22 February 2011 2
Credit Focus
Security
Strengths:
z No potential for commingling of cover pool assets and the remaining assets
on balance sheet of the issuer as the separation has already taken place
z Ideally, the issuer survives the insolvency of the mother company and
remains a fully functioning entity
Main challenges:
z Funding of the OC. If done through the mother company, insolvency of the
mother company could automatically lead to insolvency of the issuer
z Usually no claim on the mother company’s assets – the residual unsecured
claim is limited to the issuer’s balance sheet
z Operating in a post-insolvency scenario if the issuer has no or nearly no staff
Guarantee
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Credit Focus
Strengths:
z No potential for commingling of cover pool assets and the remaining assets
on balance sheet of the issuer as the separation has already taken place pre
insolvency of the issuer
z Covered bond investors have a residual claim on the remaining assets of the
bank pari passu to senior unsecured creditors should the cover pool not be
sufficient to cover all claims
Main challenges:
z Liquidity generation post insolvency as the assets are held by an SPV, which
can rely only on the cash flows that are generated by the cover assets and
the trustee selling assets from the pool
75%
50%
25%
0%
LUX
DEU - M
FRA - M
GBR - M
IRL - M
PRT - M
CAN
GRC
NLD
NOR
NZL
CHE
DEU - PS
DNK
ESP
FRA - PS
GBR - PS
IRL - PS
ITA
PRT - PS
USA
Mean
Moody’s
Moody’s TPI is the agency’s Moody’s Timeliness Payment Indicator gives the agency’s opinion about timely
opinion about timely payment on payment on covered bonds after the default of the issuer. It is quite similar to
covered bonds after the default of Fitch’s D-Factor only that Moody’s does not express it in percentage terms but
the issuer classifies covered bond programmes into six categories. As with Fitch, the legal
framework is only the starting point. Pool characteristics also play a role, which is
why different programmes in one country can have different TPIs.
That TPIs can also change over time became very obvious with Irish Mortgage
ACS being shifted to the ‘very improbable’ bucket recently. Only in October 2010,
Moody’s still had a TPI of ‘probable’ for Mortgage ACS.
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Credit Focus
S&P
S&P categories take into account S&P categorises covered bond markets into covered bond categories. Besides
the strength of the law as well as the quality of the legal framework, it also incorporates systemic importance (ie,
the significance of covered bonds the size and history of the respective markets). A fairly new market will therefore
to that specific economy never be able to get into category 1 irrespective of the quality of the law. The size
and history argument is also a main reason for Spain to be in category 1 even
though we would rate the quality of the legal framework as being below average
in a European context. As opposed to the Fitch and Moody’s ratios above, S&P’s
covered bond categories don’t differ between issuers from a given country. Cover
pool specific factors are addressed through the asset liability mismatch (ALMM)
risk score.
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Credit Focus
Legal basis
z Mortgage Banking Act (1899, last amended: 2005)
z Law on Secured Bank Bonds (1905, last amended: 2005)
z Mortgage Bond Act (1927, last amended: 2005)
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Credit Focus
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Credit Focus
Issuance structure through specialised mortgage Issuance structure through universal banks
banks
Mortgage Bank Universal Bank
Over-
collaterali-
Equity (8% of RWA) Other assets Equity +
sation Capital centre A Over-
other liabilities
All SDOs backed by collaterali-
capital centre A sation Capital centre A
All SDOs backed by
capital centre A
Over-
Capital Center X Equity (8% of RWA)
collaterali-
sation Capital Center X All SDOs backed by
All SDOs backed by
capital centre X capital centre X
Over-
Issue collaterali- Issue
Security sation
Security
Issue Issue
Investor Investor
Security Security
Source: ECBC, Crédit Agricole CIB Source: ECBC, Crédit Agricole CIB
Legal basis
z Danish Act on covered bonds (2007)
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Credit Focus
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Credit Focus
Source: ECBC, Crédit Agricole CIB Source: ECBC, Crédit Agricole CIB
Legal basis
z Covered Bond Act / CBA (688/2010)
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Credit Focus
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Credit Focus
Security Security
Source: ECBC, Crédit Agricole CIB Source: ECBC, Crédit Agricole CIB
Legal basis
z Articles L.515-13 et seq. of the French Monetary and Financial Code
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Credit Focus
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Credit Focus
Pledge
Issue Caisse de Refinancement de l’Habitat (CRH)
Billet de Mobilisation
(BDM)
Issue
Collateral
Investor
Legal basis
z Article 13 of act 1985-695
z Articles L. 313-42 to L. 313-49 of the French Monetary and Financial Code
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Credit Focus
ALM guidelines
Minimum OC 25%
Type of coverage test NPV
Is OC above the minimum protected? Yes
Mitigation of market risk Natural matching + stress testing
Mitigation of liquidity risk "Natural" matching + stress testing, liquidity facilities
Supervision and monitoring
What is the role of the supervisor? Regular covered bond specific checks
Special role of supervisor in crisis regarding No
covered bonds?
Is there an independent cover pool monitor? Yes
Segregation of assets in an insolvency scenario
Are cover assets ringfenced in an insolvency Preferential claim by law
scenario of the issuer?
Is there a separate cover pool administrator in No but CRH does not have any other material liabilities than covered bonds (OC has to be
addition to the insolvency administrator? financed by the participating banks on their level)
How can liquidity be generated post insolvency Cash flows from the pool, sale of cover assets, liquidity and capital injections from the other
(of one participating bank)? participating banks
Recourse to the credit institution's insolvency Yes, pari passu to senior unsecured creditors of the participating banks
estate?
Do derivatives survive the insolvency of the There are no derivatives on the level of CRH
issuer?
How do derivatives counterparties rank vs. n/a
covered bond holders?
Risk weight / regulatory treatment / transparency
Covered-bond-specific disclosures to the public Yes, on an annual basis
required by law?
UCITS 22(4) Yes
CRD Yes
Risk weight in the RSA 10%
Covered bond association -
22 February 2011 15
Credit Focus
Germany – Pfandbriefe
Issuance structure and overview
Legal basis
z Pfandbriefgesetz (2005) – last amended in March 2009
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Credit Focus
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Credit Focus
ACS Bank
Security
Legal basis
z Asset Covered Securities Bill, 2001
z Asset Covered Securities (Amendment) Act 2007
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Credit Focus
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Credit Focus
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Credit Focus
Legal basis
z Articles 12-1 to 12-9 of the Financial Sector Act (1993, amended in 2000 and
2008)
z CSSF circular 01/42
z CSSF circular 03/95
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Credit Focus
If a loan's LTV exceeds the LTV cap, does the part below the Yes
limit still remain part of the cover pool?
Do covered bond holders have a preferential claim on the part of No
the loan above the LTV cap?
ALM guidelines
Minimum OC 2%
Type of coverage test NPV
Is OC above the minimum protected? Yes
Mitigation of market risk Natural matching + use of derivatives
Mitigation of liquidity risk "Natural" matching + stress testing + substitute assets
Supervision and monitoring
What is the role of the supervisor? Granting licences + regular covered bond specific checks
Special role of supervisor in crisis regarding covered bonds? Safeguarding ongoing management of the cover pool
Involved in transfer of cover assets + covered bonds to another credit
institution
Is there an independent cover pool monitor? Yes
Segregation of assets in an insolvency scenario
Are cover assets ringfenced in an insolvency scenario of the Preferential claim by law, specific cover pool administration
issuer?
Is there a separate cover pool administrator in addition to the Yes
insolvency administrator?
How can liquidity be generated post insolvency? Cash flows from the pool, sale of cover assets
Recourse to the credit institution's insolvency estate? Yes, pari passu with senior unsecured creditors
Do derivatives survive the insolvency of the issuer? Yes
How do derivatives counterparties rank vs. covered bond Pari passu with covered bond holders
holders?
Risk weight / regulatory treatment / transparency
Covered-bond-specific disclosures to the public required by law? No
22 February 2011 22
Credit Focus
SPV
Guarantee
Legal basis
z Law 80/2005
z Law 130 on securitisations
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Credit Focus
22 February 2011 24
Credit Focus
SPV
Guarantee
Legal basis
z Regulation on Amending the Regulation Implementing the Financial
Supervision Act
z Decree of 3 June 2008 Regarding Covered Bonds
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Credit Focus
22 February 2011 26
Credit Focus
22 February 2011 27
Credit Focus
Bank
Bank Boligkreditt
Over-
Cover assets Equity +
collaterali-
Other liabilities
sation
Norwegian Covered Issue Investor
Bonds
Legal basis
z Law on the Financing Business (2002)
z Secondary legislation (2007)
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Credit Focus
22 February 2011 29
Credit Focus
Legal basis
z Decreto-Lei n.º 59/2006, Primary Legislation
z Portuguese Secondary Legislation - Notice number 5/2006
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Credit Focus
22 February 2011 31
Credit Focus
Source: ECBC, Crédit Agricole CIB Source: ECBC, Crédit Agricole CIB
Legal basis
z Law 2/1981 – on the regulation of the mortgage market, which was updated
by Law 41/2007
z Royal Decree 716/2009 – develops certain aspects of Law 2/1981
z Law 22/2003 – insolvency law
z Law 3/2009 – establishes that mortgage market law supersedes the
insolvency law
22 February 2011 32
Credit Focus
22 February 2011 33
Credit Focus
Issue
Security
Investor
Legal basis
z The Swedish Covered Bond (Issuance) Act 2003:1223
z Regulations and general guidelines governing covered bonds, Finansinspek-
tionen, 2004
z Government Bill – Liquidity matching for covered bonds 2009/10:1032
22 February 2011 34
Credit Focus
22 February 2011 35
Credit Focus
Guarantee
Legal basis
z Regulated Covered Bond Regulations 2008
z Regulated Covered Bonds Specialist Sourcebook 2008
22 February 2011 36
Credit Focus
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Credit Focus
Maturity structure 12 months Hard bullet + Hard bullet + Hard bullet + 12 months 12 months soft Hard bullet + pre 12 months
soft bullet pre maturity test pre maturity pre maturity soft bullet bullet maturity test soft bullet
test test
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Credit Focus
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