DBRS Releases August 2011 Monthly Canadian Covered Bond Report

DBRS has today released the Monthly Canadian Covered Bond Report, which provides an overview of the Canadian covered bond market for the month ending August 31, 2011. The report provides detailed information on this debt market, which was previously included in the Monthly Canadian ABS Report.

Canadian covered bond issuances began in 2007, following a letter issued by the Office of the Superintendent of Financial Institutions (OSFI), the regulator of Canadian financial institutions, permitting the issuance of covered bonds provided that the aggregate amount issued by any financial institution not exceed 4% of its total assets (as determined by the numerator of the asset-to-capital multiple). If at any time after issuance the 4% limit is exceeded, the covered bond issuer must immediately notify OSFI. OSFI further stated that the pledging policies of the issuing entity need to be amended prior to the issuance of the covered bonds.

Unlike many European countries, there is no explicit legislation in Canada for covered bonds at this point that prescribes asset segregation upon an issuer’s insolvency without having to transfer assets off balance sheet. Following the federal government’s announcement in the 2010 budget to create a covered bond legislative framework (the Proposed Legislation), a consultation paper was released by the federal Department of Finance on May 11, 2011. DBRS notes that building a legislative landscape in Canada that is free of conflicts, inconsistencies or ambiguities would help promote the health and resiliency of financial markets generally.

DBRS recently published a commentary on the Canadian covered bond and residential mortgage market. In addition to highlighting the current covered bond programs established by large Canadian financial institutions, the commentary examines the residential mortgage market and the liquidity of residential mortgage loans in Canada. The commentary also investigates how, during the recent financial crisis, insured mortgages, mostly through sovereign-sponsored National Housing Act Mortgage-Backed Securities and Canada Mortgage Bonds, became an important funding source and provided systemic support and liquidity to Canadian mortgage markets and lenders.

There were two new issuances from Canadian financial institutions in the month of August. Bank of Nova Scotia issued USD 2 billion, Series 4 Notes under its Global Public Sector Covered Bond Programme and Royal Bank of Canada issued CHF 75 million, CB7 Tranche 3 Notes under its Global Covered Bond Programme. As of August 31, 2011, the total amount outstanding in the market was $36.3 billion (Canadian-dollar equivalent).