The Monetary Authority of Singapore has proposed rules for residential mortgage backed covered bond issuance by Singaporean banks, including a 2% cap on cover pool size versus total assets. DBS Bank has already been mentioned as a potential issuance candidate.

MAS, the central bank and regulator, published the covered bond consultation paper on Friday, and has invited feedback on the proposals by 10 April.

Monetary Authority of Singapore building (left)

It notes that covered bonds provide an additional source of longer term funding and that under Basel III proposals they may be considered as liquid assets. However, MAS says that covered bonds “introduce risks because they increase the level of asset encumbrance of issuing banks.

“This reduces the quantum of assets available to the deposit insurance schemes and depositors in the event of the resolution of an issuing bank,” says the consultation paper. “To mitigate this risk, MAS proposes that banks incorporated in Singapore may issue covered bonds subject to the aggregate value of assets in the cover pool being capped at 2% of the value of the total assets of the bank.

“This will keep risks contained while allowing banks to tap an additional source of longer term funding.”

MAS said in the paper that it will have to be notified one month in advance of planned issuance, including the size, tenor and terms of issuance, as well as the amount of assets used to back the covered bonds.

Under the proposals, an independent cover pool monitor must be appointed that will have to certify annually that the 2% cap and other regulatory requirements are complied with. MAS also reserves the power to impose additional requirements “should MAS take the view that such issuance increases risks to depositors or where MAS considers it necessary in the circumstances of the case”.

The draft “notice to banks” says that only residential mortgage loans and derivatives held for the purpose of hedging risks arising from issuance can be included in the cover pool. An 80% loan-to-value limit is included as well as a minimum overcollateralisation level of 103%.

Market participants have suggested that DBS Bank, Singapore’s largest bank, could issue covered bonds. Last month the bank posted an advert for a vice president in its corporate treasury operations with responsibilities including managing the internal deal team for “asset backed funding issuance programmes via covered bonds and securitisations”.

The MAS consultation paper can be found via this link:

http://www.mas.gov.sg/publications/consult_papers/Reports_and_Consultation_Papers.html