Encumbrance from cover pools has remained broadly stable over the past three years, with average levels decreasing at French, German and Spanish banks in 2013 but small increases in most other countries offsetting this, according to Fitch.

The rating agency said in its latest report on covered bond-related asset encumbrance last Thursday (12 June) that cover pools alone constitute noteworthy encumbrance only for a small number of rated banks: of 142 entities in the sample, 15 have encumbrance above 50% of end-2013 adjusted assets, of which only six are above 70%. Almost 70% of issuers in the sample had a cover pool encumbrance of below 20% of adjusted assets as at the end of 2013, according to Fitch.

This comes against a backdrop of reduced covered bond issuance, reflecting lower funding needs and a stronger focus on issuing senior unsecured and subordinated debt, according to Fitch.

Hélène Heberlein, managing director of Fitch’s covered bond team, said that subdued issuance last year means the topic of asset encumbrance has been “less of a red flag” than in previous years, but that this report on banks’ encumbrance levels remains popular with market participants.

“I assume users of our ratings like to reassure themselves that covered bonds are not a major source of concern from an asset encumbrance point of view!” she said.

Total outstanding covered bonds sold to the market from banks included in Fitch’s report decreased by 6% in 2013, said Fitch.

The same countries and banks as in its previous report top the list in Fitch’s sample, according to the rating agency. Encumbrance is highest at Scandinavian, German and Spanish banks, with Landshypotek, Realkredit Danmark and Nykredit Realkredit ranking highest.

“Asset encumbrance above 80% is a reflection of their business models, based on covered bond funding,” said the rating agency. “Banks with high encumbrance mainly comprise specialised mortgage institutions that are part of a larger universal group (as is the case for Realkredit Danmark), but also independent institutions (such as the other two banks).”

Average encumbrance fell at German, French and Spanish banks in 2013, according to Fitch, reflecting deleveraging and reduction in eligible public sector assets in Germany, a focus on senior unsecured issuance in France, and a mix of asset and liability changes in Spain. This was offset by small increases in most other countries.

The rating agency considers Denmark, Germany, Spain and Sweden to be covered-bond intensive jurisdictions, as well as France and Norway.

“Fitch believes that covered bond funding can be a stable form of funding, particularly in markets where households invest a significant amount of their financial wealth outside the traditional banking system,” said the rating agency. “This is especially the case in Scandinavia.”

The way Fitch evaluates encumbrance in bank balance sheets and how this affects bank ratings will be a topic discussed at a Fitch covered bond event in London on 8 July.