Title: Mortgage Covered Bond Systems in Europe: Considerations for Turkey
1- Mortgage Covered Bond Systems in Europe
Considerations for Turkey - 31 March 2006, IstanbulThe Turkish Draft
Mortgage Law - Wolfgang Kälberer, Head of Brussels Office
- Association of German Pfandbrief Banks
2Table of Content
- The European Covered Bond market
- Minimum standards for European Covered Bonds
Art. 22 par. 4 UCITS Directive - Art. 22 par. 4 UCITS requirements
- transposition of UCITS requirements into the
different European Covered Bond systems - Experience from emerging markets
- European Covered Bond Council (ECBC)
3European Covered Bond Market
Geographical Overview - Covered Bond Legislation
in Europe(as of March 2006)
Legislation in countries of the EU/EEA/CH
19
2000
2006
2003
Legislation infuture EU member and further
countries in transition
23
2004
1998
2002
2003
2005
1998
4
? 1997
2006
1995
Concrete legislation in preparation
2005
1999
1997
2006
2005
3
1990
2003
2000
Legislation underconsideration
2
28
4European Covered Bond Market
Volumes Market Shares of European Covered Bond
Countriesin the European Covered Bond Market
(end of 2004) 1.554 bn
for comparison UK covered bonds 11 bn
(09/2004 14 bn )
(Source EMF/VDH 22.11.2004)
5Mortgage Covered Bonds vs. Public Sector Covered
Bonds in the EU (end of 2004, in bn EUR)
European Covered Bond Market
Total 866,5
Total 688,11
(Source EMF/vdp -22.11.2004)
6Jumbo Covered Bonds
European Covered Bond Market
Jumbo supply 2005 133.5bn Forecast 2006
150bn
Source DrKW Debt research
7- Minimum standards for European Covered Bonds
- Art. 22 par. 4 UCITS Directive (Directive
2001/108/EC amending Directive 85/611/EEC on
Undertakings for Collective Investments in
Transferable Securities) - Credit institution as issuer
- Specific legislation (legal basis)
- Cover principle (assets matching liabilities)
- Specific supervision
- Preferential claim for bondholders in the case of
bankruptcy of the issuing institution - European Covered Bond legislations are not
relying on a fully harmonised regime - UCITS Directive is only setting a framework for
20 different types of Covered Bonds in Europe - De facto convergence of European Covered Bonds
- capital market and rating agency requirements are
driving European Covered Bond legislations to
converge
8UCITS requirement N 1
- Covered Bonds issued by a credit institution
- as totally specialised funding vehicle
- France, Finland, Norway (no or only few staff,
only eligible assets on the balance sheet) - as specialised bank
- Denmark, Ireland, Poland, Hungary, Sweden,
Luxembourg (fully equipped, all bank functions) - as universal bank with a qualified license
- Austria, Germany, Russia, Latvia, Slovenia
- as universal bank without a qualified license or
without specific requirements to obtain the
license - Spain, Czech Republic, Slovakia, Lithuania,
Austria, Bulgaria
9UCITS requirement N 2
- Covered Bonds issued on the basis of specific
legislation - almost all European Covered Bonds are issued on
the basis of specific legislation - legislation allows Covered Bonds to be recognised
as a common asset class based on high quality
standards - legislation ensures investor recognition without
the need to analyse each single CB issue
(opposite to MBS) - bankruptcy remoteness relies on legal provisions
instead of contractual agreements - Covered Bonds without legal basis are commonly
defined as structured covered bonds - United Kingdom Covered Bonds
- Dutch Covered Bonds
- are using MBS techniques by pledging or
assigning cover assets to Special Purpose
Vehicles which guarantee the bonds
10UCITS requirement N 3
- Cover Principle mortgage assets have to cover
the liabilities deriving from Covered Bonds - Valuation of the cover pool nominal value or net
present value - Property valuation market value or mortgage
lending value - Loan-to-value ratios
- Dynamic cover pools (vs. static MBS portfolios)
11UCITS requirement N 3 Cover pool valuation
only nominal value calculation
NPV-calculation
as of 12.10.2005
12 UCITS requirement N 3 Property valuation rules
Property valuation rules underlying eligible
mortgage cover assets
Mortgage lending value
12
(including prudent market value)
Market value
12
as of 02/.2006
13 UCITS requirement N 3 Loan to Value Ratios
Loan to value ratios as basis for eligible
mortgage cover assets
60
7
70
3
OTHER / SEVERALLTVs
14
as of 02/2006
14 UCITS requirement N 4
- Banking supervision cover pool monitor
-
- The supervisory requirement is met
by - the status of the issuer as credit institution
- through a cover pool monitor
NO CZ, LV, FIN, DK, GR, CH, E, PT, SWE, BLG
YES GER, SLK, H, LUX, PL, F, IRL, AUS, NO, UA,
ROU
Cover pool monitor
NO others
YES F, LUX, ITA, ROU, in practice H
Monitor has to qualify as auditor
as of 2.11.2005
15UCITS requirement N 5
- Preferential claim of bondholders in the case of
bankruptcy of the issuing institution - The preferential claim of bondholders is secured
through quasi bankruptcy remoteness of cover
assets and Covered Bonds - Bankruptcy remoteness itself is achieved by
segregation of cover assets from the credit
institutions other assets in the case of its
insolvency - The less Covered Bond issuers are legally
specialised, the more and detailed Covered Bond
regulations shall be in order to achieve clear
asset segregation and bankruptcy remoteness, both
fundamental prerequisites for capital market /
investor confidence - From a rating agencys perspective, timeliness of
payments in the case of bankruptcy of the issuing
institution appear to be one of the core criteria
16UCITS requirement N 5
What does covered mean?
purpose transformation of cover assets into
covered bonds
cover assets
covered bonds
?
?
designation of cover assets toholders of covered
bonds
- quality of assets
- management of
- interest rate risks
- liquidity risks
- operational risks
?
- segregation of cover assetsfrom originators
other assets in caseof insolvency of originator - bankruptcy remoteness of cover assets and
covered bonds
?
timeliness of payment realistic?
?
The less covered bond issuers are legally
specialised, the more and detailed regulations
their covered bonds need in order to achieve
clear segregation and bankruptcy remoteness and
to convince capital markets of it.
17UCITS requirement N 5
- Level of asset segregation and bankruptcy
remoteness are driven by - Identification process of cover assets
- The way how cover assets are segregated from the
insolvencys estate (automatically by law or are
additional steps necessary ?) - The extension or non-extension of the insolvency
process to covered bonds - Access to liquidity in order to maintain cover
business in case of insolvency of the issuer
18UCITS requirement N 5
Cover identification through a cover register as
a prerequisite for a clear and quick segregation
of cover assets from the bankruptcy estate,
although considerable differences regarding the
structure and the administration of cover
registers remain
YES
21
DK implicit register
NO
2
as of 12.10.2005
19UCITS requirement N 5
Asset segregation mechanism- in most European
legislations by law- administration by a
special cover pool administrator or by a general
insolvency administrator managing all
assets of the insolvent institution ?
11
?
special cover pooladministrator
14
?
general bankruptcyadministrator
as of 02/.2006
20UCITS requirement N 5
Asset segregation mechanism
- Do the cover assets form a separate legal
estate?Is there only an insolvency privilege?
When issueris insolvent, cover assets are
?
legally separated (trust)
?
part of insolvency estate, but holders of covered
bonds have insolvency privilege
as of 2.11.2005
21UCITS requirement N 5
Extension of the insolvency process to covered
bonds
14
- do covered bonds accelerate automatically when
the issuer goes insolvent?
NO
?
Do derivatives accelerate, which arepart of
thecover pool?(netting)
NO ok
YES problem
10
?
YES
cash flow for investor not foreseeableover whole
maturity of covered bond
?
Do coverassetsaccelerate?
YES
NO
liquidity problems of the bankruptcy estate
liquidity problems of the debtors/clients of
the insolvent bank estate
as of 02/.2006
22UCITS requirement N 5
Access to liquidity in order to maintain cover
business
- Who is entitled to the cover assets?
- Who has the first access to the cash flows on
cover assets? - Is there a mandatory / voluntary / insolvency
remote OC? - Are liquid (substitute) cover assets allowed for
the cover of mortgage covered bonds? - Can the (special) administrator of the cover pool
take out a loan to get liquid assets? Would this
loan rank pari passu with the covered bonds? - Are there any specific regulations for the sale
and transfer of mortgages respectively to other
issuers? How easy is the sale of mortgage cover
assets? - are cover assets be sold off, transferred to
another covered bond issuer or managed until
final maturity of all claims ?
23III. Experience from emerging markets
Poland
- no subsidies for covered bonds
- high liquidity via cheap deposits
SourceMortgage Credit Foundation / National Bank
of Poland
24III. Experience from emerging markets
Hungary
- subsidies for residential mortgages and covered
bonds - deposits relatively expensive
(Source Mortgage Credit Foundation / FHB Land
Credit and Mortgage Bank)
25III. Experience from emerging markets
Russia
(Source Mortgage Credit Foundation / Delta
Credit)
26III. Experience from emerging markets
Portugal
- deposits no longer sufficient in order to fund
mortgage loans
27IV. European Covered Bond Council
Why to create an ECBC?
- Tremendous growth of covered bond market
- Volume outstanding over EUR1.6 trillion (end 04)
- Active covered bond markets in 23 European
jurisdictions - Increased investor awareness of covered bonds as
a prime asset class - But no common representation and strategy at EU
level, especially in the light of the capital
requirements directive (CRD) discussions - The development of entire market as a whole is
beneficial for all issuers - Joint platform for all market participants
28IV. ECBC
Objectives of ECBC
- To represent and to promote the interests of
covered bond issuers and market participants - To enhance the visibility of covered bonds as a
specific asset class - To act as a network and a platform for exchange
of information - To study measures that could be adopted at
European level and advocate its members position
and market-related initiatives - To publish position papers, reports, comparative
studies and statistics on covered bond markets
and organize marketing events
29IV. ECBC
ECBC working groups
- CRD Lobbying at EU level to ensure ECBC
positions reflected in CRD text work on
implementation - Technical Issues Analysis of topics such as
bankruptcy remoteness, collateral and the use of
derivatives in cover pool, preparatory work for
covered bond definition - Statistics Methodology and collection of cb
statistics - Trading Standards Minimum standards for market
making for Jumbo's, conventions on trading
standards and the market-making process. - European Covered Bond Factbook Annual cb
publication - Rating Agency Approach Modification of rating
methodology requirements
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