The application of new bank regulations to Caisse de Refinancement de l’Habitat could result in a reduction in its activity and in a worst case scenario prompt its wind-down, Barclays analysts have warned, arguing that such treatment would be “inappropriate”, while CRH’s chairman told The CBR that investors are unaffected by the matter.

CRH issues covered bonds to raise funding on behalf of its shareholders, which are the major French banks, from whom it receives promissory notes backed by residential mortgages. It is governed by its own legislation and is the largest issuer of euro benchmark covered bonds with Eu50bn outstanding, according to Barclays research.

However, according to the analysts, it appears that the French authorities are applying standard bank regulations to CRH with respect to areas related to the ECB’s comprehensive assessment and asset quality review, while the leverage ratio and large exposure limits are other issues over which there is uncertainty.

They cite, for example, a request by the French regulator (Autorité de Contrôle Prudentiel et de Résolution, ACPR) that CRH increase its Common Equity Tier 1 ratio from 5.7% to 10%, noting that the ECB will require a level of 8% in its baseline scenario. CRH has since presented to its shareholders a plan to raise up to Eu300m of extra capital.

CRH could also fall foul of leverage ratio requirements, according to the analysts, with Eu312m of equity against Eu53.1bn of assets as at 31 December 2013 giving it a (simplified) leverage ratio of 0.6% – against a target of 4%+ for most major banks in Europe on a fully-loaded CET1 basis and including Additional Tier 1 (AT1). They note that even after the planned equity increase CRH’s leverage ratio would only move up slightly, to around 1%.

“In fact, in order to reach the lower limit of the 3%-4% target range of most European banks, CRH would need to further increase its capital by another Eu1bn, a level which would make funding through CRH unattractive to its stakeholders,” said Barclays analysts. “The other alternative would be to more than halve its balance sheet and shrink it by about Eu35bn.”

“According to our calculations, assuming a target return of equity of 10%, French banks may require 5.5bp-6bp of lower funding costs from CRH versus issuing covered bonds in their own name,” they added. “Following the capital increase, the threshold will increase by another 4bp-4.5bp. Currently, there is hardly any spread differential between CRH bonds and covered bonds issued by its stakeholders in their own name.”

Barclays analysts argue that it would be inappropriate for CRH to face such a fate.

“Beyond the pure funding costs, using CRH has some other advantages for the major banks,” they said. “In particular, it allows them to diversify funding and access capital markets in difficult times without putting an additional strain on counterparty risk limits of their investors.

“CRH was the only French issuer tapping the capital market with new benchmark issues shortly after the Lehman crisis in Q4 08. Its unique business model and status is the reason why it has developed into a major contributor to the funding of the French housing market.”

Indeed, they said that lawmakers and bankers from other countries have enquired about the CRH model with a view to developing similar platforms.

The analysts therefore suggest that – with full exemption from CRD IV/CRR difficult – CRH be given exemptions with respect to individual items, in particular those relating to leverage, liquidity risk and large exposures.

In the meantime, they expect the uncertainty over how CRH will be affected by regulation to continue to subdue its issuance activity and its balance sheet to shrink. CRH’s last euro benchmark issuance was a Eu500m January 2025 deal in June 2013.

Henry Raymond, chairman and chief executive of CRH, acknowledged that discussions regarding the regulation of CRH are ongoing and that this explains why it has not been issuing.

However, he said that the uncertainty does not affect the quality of CRH covered bonds.

“For investors, there is no issue at all,” said Raymond, “because, firstly, the CRH mechanism is a pass-through, which is to say that the servicing of our debt is done by the French banking system. Secondly, if we don’t issue bonds it is no problem for us because we make no fees on the deals, so it is not necessary for us to issue to generate any margins for paying our debt.

“And thirdly, our shareholders have decided to maintain our status as a European credit institution, so there is also no issue regarding the status of our issuance as covered bonds.”