Fitch found asset encumbrance resulting from cover pools to have been broadly stable from 2011 to 2012, according to an update to its research on the topic yesterday (Wednesday), but said that disclosure has improved.

Fitch, Canary Wharf

The rating agency’s survey took in 135 entities (101 banking groups) that it rates.

For the first time the ranking in Fitch’s report was based on cover pool size, rather than covered bond funding, as a proportion of a bank’s assets, which the rating agency said was possible given better disclosure. It noted that initiatives are underway to improve encumbrance disclosure further.

Cover pool encumbrance was broadly stable from 2011 to 2012, averaging 10% last year, according to Fitch. It said that trend drivers vary.

“Growing use of covered bond funding for some banks is based on necessity, borne from limited access to unsecured funding,” said Fitch. “More stable use comes from banks in countries where covered bonds have accounted for a large share of financing for a long time.”

The rating agency highlighted developments such as the cancellation of securitisations leading to higher encumbrance in Spain, and deleveraging in Germany including cover pools, often leading to slight decreases in encumbrance.

Newly opened markets are unlikely to witness high levels of encumbrance resulting from covered bonds given issuance limits, Fitch said.

“Banking authorities in countries that have adopted covered bonds more recently have put in place regulatory limits on cover pool size or covered bond issuance,” it said. “Covered bond issuers in these countries unsurprisingly remained in the lowest bucket (0%-10%).”

For example, Fitch noted that in Australia legislation introduced in late 2011 specifies that assets in the cover pool cannot exceed 8% of domestic assets.

For coverage of previous Fitch research on asset encumbrance and covered bonds, which explains the rating agency’s views on the importance of the issue and how it tends to vary across issuers and countries, please see here for its last report, in June 2012, and here for earlier research.