A Bank of Italy consultation on proposals that would allow banks with own funds below EUR250m to issue OBGs for the first time closed on Sunday, but endogenous and exogenous factors are expected to limit its impact, even if the initiative has been welcomed.

On 14 June, the Banca d’Italia published for consultation changes to its provisions for the supervision of covered bond issuance by Italian banks. The changes were put forward partly in anticipation of the implementation of a harmonised EU covered bond framework, to better align Italy’s framework with that proposed by the European Commission. The public consultation closed on Sunday.

The proposed changes remove a minimum EUR250m own funds threshold for Italian banks to issue covered bonds. Under existing rules, banks that pass this threshold may issue covered bonds with no close follow-up public supervision – an approach that Florian Eichert, head of covered bond and SSA research at Crédit Agricole, notes is not aligned with the European Commission’s proposals.

“As a consequence, special public supervision is one of the areas that Italy will most likely have to adjust once the covered bond directive comes into force possibly late next year or in early 2020,” said Eichert.

Should the proposals be implemented, banks with own funds of less than EUR250m would be permitted to set up covered bond programmes after receiving approval from the Bank of Italy, which would be subject to preliminary evaluations conducted on a case-by-case basis.

This would in theory allow smaller Italian banks to access the covered bond market either directly, said Eichert, or via pooling mechanisms.

“After all, the EUR250m requirement also relates to banks that are merely transferring assets to the guaranteeing SPV, even if they themselves are not the issuers,” he added. “As a consequence, following rather rapid expansion up to 2012, the number of Italian OBG issuers has stabilised at 14 in recent years.

“The only real area of growth has been the number of programmes, as issuers set up second OBG programmes for repo purposes.”

Analysts at Scope have highlighted that many smaller banks have been excluded from entering the covered bond market by the minimum threshold, as some 500-plus banks were active in Italy as of the end of 2017.

“Bearing in mind the breadth of the Italian banking sector, there is ground to make up,” they said.

Scope said it views positively that smaller issuers would be able to broaden their funding sources towards less market-sensitive covered bond funding, but noted that banks with own funds below EUR250m would be unable to issue benchmark-sized deals on their own. As deals below EUR250m will not qualify for inclusion in LCR calculations, investor appetite could be low for such deals, potentially mitigating any positive impacts of the proposed change, said the rating agency.

Although the small banks would be unable to directly issue benchmark-sized deals, Eichert noted the sub-benchmark covered bond segment has become an established niche market that is increasingly accepted by investors.

Eichert noted that while UBI Banca uses an intragroup pooled funding model, no joint funding models for entities in separate banking groups are currently used in Italy. The European Commission’s proposed covered bond Directive includes techniques for both forms of pooling, and the removal of the EUR250m threshold could allow smaller Italian banks to participate in such projects, said Eichert.

However, the Scope analysts said the bank of Italy has missed an opportunity to boost the OBG market by not including in its proposals the pooling models proposed by the Commission – which were designed to support market access for smaller banks.

“It is a bit surprising that Italy is applying such a minor change to comply with a tiny part of the EU covered bond principles, but is not at the same time making use of the covered bond pooling option that is also one of the principles of a European covered bond,” said Karlo Fuchs, head of covered bond ratings at Scope. “Pooling models have been adapted and are working very well in countries like Norway.”

However, Eichert said that in reality, the removal of the threshold would be unlikely to have any impact in the short term as it is difficult to see how smaller issuers would be able to access the market in current conditions.

The Italian covered bond market was reopened this month after six months without supply, but recent deals from Mediobanca, BPER and Banca BPM have met limited demand despite offering successively higher spreads and new issue premiums of up to 28bp.

“In the current times of still-elevated BTP spreads and political uncertainty, investors seem to prefer household names still, even in the covered bond space,” said Eichert.

“Allowing smaller issuers to access the market is a positive thing. However, it does always take two to tango and at this stage it is hard to imagine investors would be so good as to join in.”