The lower rating limit for covered bonds to be eligible for liquidity buffers under Basel III remains AA-, the Basel Committee on Banking Supervision has confirmed, after some market participants had suggested that a broadening of eligibility to include corporate bonds rated as low as BBB- might also – sensibly – apply to covered bonds.

Announcing on Sunday that a broader range of assets would be eligible as Level 2 assets under the Basel III liquidity coverage requirement, the Basel Committee created a Level 2B category that can comprise up to 15% of High Quality Liquid Assets (HQLA) in liquidity buffers. As well as certain RMBS and common equity, this includes corporate bonds rated A+ to BBB-.

A lack of detail in the Basel Committee’s original announcement and related documents led some market participants to suggest that covered bonds rated A+ to BBB- might also qualify as Level 2B assets.

“Covered bonds are not mentioned as eligible Level 2B assets,” said a covered bond analyst. “However, as ‘qualifying corporate debt securities rated between A+ and BBB-‘ are mentioned as eligible Level 2B assets, one could argue that covered bonds rated between A+ and BBB- could also qualify as Level 2B assets.

“This conclusion does not seem far-fetched given that the section regarding Level 2A assets includes the following sentence: ‘corporate debt securities and covered bonds that satisfy the following conditions…’”

However, a spokesperson for the Basel Committee told The Covered Bond Report yesterday (Monday) that there has been neither an extension of eligibility for covered bonds nor any other change to their position in LCRs.

Another Basel Committee source said: “In short, the treatment has not changed since the original publication of Basel III in December 2010. Covered bonds are still considered ‘Level 2’ assets, which are subject to a 15% haircut and can comprise up to 40% of the stock of High Quality Liquid Assets. The annex we published yesterday (Sunday) was slightly revised to show covered bonds are still part of HQLA.”

Fritz Engelhard, German head of strategy at Barclays, questioned the Basel Committee’s position.

“It appears somewhat inconsistent to include single-A to triple-B rated corporate bonds in the Level 2 bucket, but not similarly rated covered bonds,” he said.

And analysts at RBS said that covered bonds face an “artificial rating cliff” because they are no longer eligible as soon as they are downgraded to single-A (on a “best rating” basis).

“There is no transition – the bonds are either in or the bonds are out,” they said. “We fear that this will contribute to a further spread differentiation between single-A and double-A rated covered bonds and artificially increases the importance of ratings.”