DBRS Publishes “Towards a Harmonised Covered Bond Instrument – Overcollateralisation: Size Matters Little” Commentary

DBRS Ratings Limited (DBRS) released a commentary following the publication of the European Banking Authority’s recommendations on harmonisation of covered bond frameworks in the European Union.

In DBRS’s view, setting a minimum requirement based on nominal overcollateralisation (OC) would be easy to apply and recognise across the board; DBRS notes, however:

1. A 5% nominal OC is unlikely to generate a sizeable uplift from the rating of the issuer;
2. It could create a false sense of comparability across jurisdictions and programmes;
3. National regulators should maintain strict control over the general quality of the cover pool and covered bonds (CB).

In DBRS’s opinion, a CB investor can reasonably expect that a going concern issuer would maintain the performance of the cover pool and support the quality of the CBs in general. This shifts the focus on the cover pool monitor and CB regulator’s ability (and interest) in maintaining cover pool quality.

Notes:
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

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