DBRS Morningstar Updates Its List of Jurisdictions for which Covered Bonds are Considered Systemically Important

DBRS Morningstar has added Portugal to the list of European jurisdictions that it considers to be reliant on covered bonds (CBs) as a systemically important financing instrument, largely as a result of new CB legislation. The move follows a review of the European CB market, including the level of outstanding CBs, issuance volumes, and established legal frameworks across Europe. DBRS Morningstar expects the assessment to have a marginally positive impact on the ratings of a limited number of outstanding Portuguese CB programmes, in particular, those where the reference entity is not assigned a Critical Obligations Rating.

In Portugal, CBs are a well-established funding instrument and many banks have become frequent users of CB programmes since 2006 A number of indicators underscore the systemic significance of Portuguese CBs. These include the high proportion of CBs outstanding as a percentage of gross domestic product (GDP); as a percentage of lending for home purchase; and as a percentage of banks' liabilities. The significance of CBs for the funding of the financial sector is further underlined by the high level of CB issuance currently outstanding as a percentage of other long-term debt securities among monetary and financial institutions.

Portugal joins Denmark, France, Germany, Ireland, Italy, Spain, and Sweden as countries which DBRS Morningstar considers to be reliant on CBs as a systemically important financing tool.

Notes:
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The commentary is available at www.dbrsmorningstar.com.

For more information on DBRS Morningstar’s ratings, including definitions, policies and methodologies, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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