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Korea readies covered bond law on structured shortcomings

South Korea’s Financial Services Commission is proposing covered bond legislation that is expected to go before the country’s parliament in the autumn after deciding that covered bond guidelines released in June 2011 are insufficient.

The FSC said today (Thursday) that the best practices it had published had shortcomings in that structuring costs were too high and there was uncertainty about the strength of bondholders’ claims in the dual recourse instrument.

The regulator also said that the move has been prompted by responses to the financial crisis such as Basel III and the deteriorating financial markets in Europe.

It said that the proposed legislation should help bank’s funding costs, give them access to stable long term financing, and contribute to expanding the provision of long term fixed rate mortgages for households.

According to Korean press reports, legislation will be drafted in the coming month and then reviewed between August and October, after which it will be put to the country’s National Assembly.

Only Kookmin Bank and Korea Housing Finance Corporation have issued covered bonds in South Korea. Kookmin did so, with a $1bn issue in 2009, on a contractual basis, while Korea Housing Finance Corp has issued under legislation governing the state-owned institution, pooling collateral from several Korean banks.