Changes to covered bond legislation in Italy proposed by the Bank of Italy will reduce uncertainty and have a positive impact on the credit quality of cover pools, Moody’s said yesterday (Tuesday), but the rating agency warned that proposals to lower capital requirements, allowing more banks to issue, could have a negative effect.

Banca d'Italia, Rome

Commenting on the proposals, which were announced by the Italian central bank on 4 April, the rating agency said that plans to restrict the acceptance of securitised notes will increase the quality of cover pools for obbligazioni bancarie garantite (OBG). The restrictions that will lead to the prospective increase in credit quality are: if the proportion of securitisation notes exceeds 10% of the cover pool then the underlying assets have to be originated by the issuer, and the issuer will have to retain the junior notes, which are deemed riskier.

“The proposed regulation also explicitly states that the issuer and the guarantor should be able to verify, at any time, the eligibility of the underlying securitised assets, 95% of which should be eligible for the OBG pools,” said Elise Savoye, assistant vice president and analyst at Moody’s. “The proposed regulation also extends to securitisation deal participants a duty to provide the required data to the asset monitor.”

In Italy securitisations of mortgages originated by a covered bond issuer have been used in cover pools to facilitate structuring.

According to Moody’s, the asset monitor would also be required to the check the eligibility of the underlying securitised assets in the same manner that it assesses assets directly belonging to the pool.

The rating agency said that under the proposals, an issuer would be required to recalculate its loan-to-value (LTV) ratios each time property valuations are updated.

“These additional details provide more guidance on the monitoring of the cover pool and reduce uncertainty in regards to the practical application of the LTV eligibility criteria,” said Savoye.

However, Moody’s cautioned that the credit quality of OBG pools could be negatively affected by a lowering of capital requirements, with a minimum consolidated supervisory capital for issuers of Eu250m instead of Eu500m, which will increase the number of potential OBG issuers.

“This could negatively impact the credit quality of the OBG pools; for example, smaller banks’ portfolios might display less regional diversification and higher correlation risks relative to the issuer’s performance,” said Savoye. “However, the capital requirement remains high which prevents small-sized banks and those of lower creditworthiness from issuing OBGs.”

In addition, the rating agency said that stricter requirements on asset encumbrance could reduce future asset availability to cover pools, saying that the regulation defines the Tier 1 ratio as the determinate for the amount of assets an issuer can transfer to the cover pool.

“This implies that for a given Tier 1 ratio, the amount of assets that could be transferred may be further restricted, reducing future asset availability for the OBG pool,” Savoye said. “However, this does not affect the assets already transferred and we do not expect the tightened asset transfer limits to have any immediate effect on the existing OBG programmes.”