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S&P: Covered bonds to grow under new EU framework, Japanese market conditions

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S&P: Covered bonds to grow under new EU framework, Japanese market conditions

The issuance of covered bonds is on track to expand in new markets in 2019, benefiting from European-led legislative initiatives and positive market developments, S&P Global Ratings said.

The European Commission in March 2018 adopted a directive that provides a common definition of covered bond products and an amendment to the capital requirements regulation.

The European Parliament is expected to vote on the proposed framework in April.

S&P said the framework, once finalized, would boost covered bonds across Europe "by raising the standards for asset quality, disclosure, and supervision." The EU framework is also expected to encourage legislators and regulators in other regions to align their rules to the same standards, the March 21 S&P Global Ratings report said.

The rating agency sees covered bonds expanding further in Central and Eastern Europe, where legislative frameworks are being enhanced or introduced.

In Asia, Japan is expected to boost its presence in the covered-bonds market, so far dominated by Singapore and South Korea. S&P said Japan "has the potential to grow quickly," despite the absence of a dedicated covered bond legal framework there, due to the mortgage market's size and local lenders' funding needs in foreign currencies.

Meanwhile, S&P said the lack of any legal framework in Latin America limits the development of covered-bond issuance in the region. It added, however, that legislative initiatives in Brazil could spur action from other countries.

S&P noted interest among Brazilian banks in issuing cross-border covered bonds, saying this could materialize once authorities provide legal and regulatory clarification on how such issuances could be done.

Apart from these legislative developments, S&P said new covered-bond issuance stands to benefit from current market conditions "backed by positive, albeit softening, global economic growth and a more dovish stance from the Federal Reserve and the European Central Bank."