The potential for a more accommodative covered bond policy in Singapore allowing smaller issuers to enter the market was discussed at recent industry events in the country, but an early relaxation of a 4% cap is deemed unlikely. Making Singapore dollar issues eligible for central bank repo is considered more likely.

In a sector comment published yesterday (Thursday), Moody’s gave its views on key topics raised at European Covered Bond Council (ECBC)-linked events in Singapore in the week commencing 6 March. Participants identified regulatory support as being particularly crucial to the development of Asian covered bond markets.

An issuance limit imposed by the Monetary Authority of Singapore (MAS), which caps cover pool size at 4% of an issuer’s total assets, was discussed and Moody’s said an eventual raising of the limit would be supportive. It noted that while the three largest domestic Singaporean banks have established covered bond programmes, foreign banks incorporated in Singapore have not yet joined the market.

“Such foreign banks generally have smaller mortgage portfolios to support covered bond issuance than domestic banks,” said the rating agency. “Increasing the issuance limit in Singapore from the current 4% would allow such banks to issue greater amounts of covered bonds, which would increase the cost-effectiveness of covered bond programmes.”

DBS Bank, United Overseas Bank and, most recently, Oversea-Chinese Banking Corporation have issued Singaporean covered bonds. Since DBS inaugurated the market in July 2015, the three issuers have collectively issued Eu4.172bn (S$6.3bn) equivalent in benchmark covered bonds.

Following the event, some news reports suggested that MAS could be considering raising the 4% limit.

However, Florian Eichert, head of covered bond and SSA research at Crédit Agricole – who attended an ECBC working group in Singapore – said he would be surprised if the limit is raised in the near term. He noted that representatives of MAS are happy with the evolution of the Singaporean market so far and said that there will be “sufficient time” before a revision of the limit.

“In the case of Singapore we are actually a little surprised to see MAS even discuss the possibility at this early stage of the market’s development,” Eichert said. “It was rational to discuss the absolute limit while the covered bond framework was set up.

“Now that the limit has been set at 4%, though, revisiting it after a handful of new issues is a little early in our view.”

He believes that in the longer term, MAS would be happy to revisit the limit if required, potentially to align it with the 8% issuance limits of older covered bond markets, such as Australia.

Representatives of MAS did, however, hint that a more likely measure could be to make Singaporean dollar-denominated covered bonds eligible as collateral for repo with the central bank.

Moody’s said such a move would be credit positive for Singaporean covered bonds because it could reduce refinancing risk.

“It is more attractive for banks to purchase cover pools if they can be funded by central banks via repo transactions,” he said. “The discount in selling the cover pool, and hence the market value loss, would be reduced accordingly.”

In other Asian countries where covered bonds have not been issued, the lack of regulation was identified by attendees as being one of the major hurdles preventing large scale issuance in the near term. They cited examples such as China, where there is no legal framework to support the segregation of cover pool assets.

“Our view is that covered bonds are a viable funding option for financial institutions in some Asian common law countries,” said Moody’s. “At present, Asian covered bond funding costs may only be marginally cheaper than unsecured debt in some countries.

“However, during crisis periods, when unsecured debt markets may shut down, the cost savings offered by covered bonds may be more significant, as occurred in Europe during the financial crisis.”