Battle for Covered Bond liquidity treatment steps up

Covered Bond issuers and investors will soon have clarity on just how European regulators will treat their bonds in relation to liquidity ratios in the future. Under Basel III, banks are required to hold liquidity buffers in assets made up of at least 60% of "Type 1" 0% risk weighted government securities and a max of 40% of "Type 2" AA- rated 20% risk weighted securities that includes covered bonds.

The covered bond market has been pushing for their bonds to be included in the Type 1 bucket for some time with little success but discussions seem to have intensified in recent weeks amid some hope that some form of compromise can be reached.

The outcome of discussions with regulators will have profound effects on both the future size of the covered bond markets and the profitability of European banks under Basel III. Keeping covered bonds as part of the Type 2 group of assets will reduce demand from investors, driving yields higher and reducing issuance. Moving covered bonds into the Type 1 category will potentially drive significant issuance from issuers as banks increase their holdings in covered bonds as opposed to sovereign debt in order to maximise returns on their liquidity buffers. A full update of the story can be seen here 

http://www.bloomberg.com/news/2014-05-06/eu-covered-bond-talks-intensify-as-bank-liquidity-rules-in-play.html