Links 8/1/08


  1. doc holiday

    Just for fun, some covered bond crap:


    Investors should beware that, in the absence of a clearly communicated overcollateralization strategy,
    covered bond ratings on a particular issuer could demonstrate a lower long-term rating stability
    compared with typical securitizations where possible pool migrations are clearly defi ned in advance.
    This is because the overcollateralization necessary to achieve a given target rating is typically over
    and above the minimum regulatory overcollateralization requirements. A bank’s clearly communicated
    strategy with regard to expected credit risks, the diversifi cation of the cover pool, tolerance levels for
    interest rates, currency rate risks, and liquidity risks, as well as the willingness to provide a cushion
    over and above the minimum regulatory requirements, can on the other hand mitigate such risk. A
    commitment to the Covered Bond compliance test is regarded as an adequate practical application of
    the above.

  2. Anonymous

    Ok, one more: I like the ability to swap and transfer, i.e, substitute components of these toxic QSPEs:

    Irish Covered Bonds Primer:

    Substitute assets with a maturity of up to three months and up to a limit of 20% of total
    cover assets are allowable

    The Act defines substitute assets as
    deposits with eligible banks or tier one assets. The Act also provides that any other specified
    kind of property may be designated by Ministerial order as a substitution asset

    Third, the legislation is flexible in many respects, including
    the relatively wide geographical base for qualifying loans, provision for the use of
    substitution assets and derivatives, and the scope for overcollateralisation.

  3. dh

    Ok, another:

    Covering Covered Bonds

    If the insurance company’s General Account is insolvent, the separate account policyholders are secured by the assets of the separate account. The separate account is tested quarterly for sufficiency of assets over liabilities. If there isn’t enough of a positive margin, more securities must be added. If those assets prove insufficient in an insolvency, they stand in line for the difference with the general account claimants.
    That last example, obscure as it is, is the closest to the way a covered bond functions under the current Treasury Department’s statement on best practices for covered bonds.

    Here is what collateral is eligible for the as the pool of assets securing the bonds (stuff from the Treasury document in italics):

    Covered Bonds may account for no more than four percent of an issuers’ liabilities after issuance.

    Issuers must enter into a deposit agreement, e.g., guaranteed investment contract, or other arrangement whereby the proceeds of Cover Pool assets are invested (any such arrangement, a “Specified Investment”) at the time of issuance with or by one or more financially sound counterparties. Following a payment default by the issuer or repudiation by the FDIC as conservator or receiver, the Specified Investment should pay ongoing scheduled interest and principal payments so long as the Specified Investment provider receives proceeds of the Cover Pool assets at least equal to the par value of the Covered Bonds. The purpose of the Specified Investment is to prevent an
    acceleration of the Covered Bond due to the insolvency of the issuer.

  4. dh

    Best Practices for Residential Covered Bonds

    In the case of an issuer default, Covered Bonds are structured to avoidprepayment prior to the date of maturity. This is accomplishedthrough swap agreements and deposit agreements (e.g., guaranteedinvestment contracts). MBS investors, in contrast, are exposed toprepayment risk in the case of a mortgage default or prepayment.

    The FDIC recognizes that some covered bond programs include mortgage-backedsecurities in limited quantities. Staff believes that allowing some limited inclusionof AAA-rated mortgage-backed securities as collateral for covered bonds duringthis interim, evaluation period will support enhanced liquidity for mortgagefinance without increasing the risks to the deposit insurance fund. Therefore,covered bonds that include up to 10 percent of their collateral in AAA-ratedmortgage securities backed solely by mortgage loans that are made in compliancewith guidance referenced above will meet the standards set forth in the PolicyStatement. In addition, substitution collateral for the covered bonds may includecash and Treasury and agency securities as necessary to prudently manage thecover pool. Securities backed by tranches in other securities or assets (such asCollateralized Debt Obligations) are not considered to be acceptable collateral

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