The Monetary Authority of Singapore (MAS) has raised its covered bond encumbrance limit from 4% to 10%, paving the way for a potential doubling of issuance volumes and expansion of issuers, in a move welcomed as progressive by Colin Chen of DBS Bank and the Association of Banks in Singapore.

The previous limit on cover assets as a percentage of a bank’s total assets in Singapore was a “very restrictive 4%”, in the words of DZ analysts, who flagged the increase to 10%, which was announced in a notice last Thursday.

MAS’s move was welcomed by Colin Chen, managing director and co-head of financial institutions and structured products at DBS Bank, who chairs the covered bond committee of the Association of Banks in Singapore.

“Suffice to say that the issuers are all happy,” he told The CBR, “and potential issuers, too.”

Chen noted that Singapore banks’ covered bond programmes had been sized at a level commensurate with the 4% cap, with a degree of flexibility built in.

“With this increase in the encumbrance limit, you could easily see a doubling of programme sizes,” he said, “with no shortage of eligible residential mortgage assets to put into the cover pools.”

Market participants have previously suggested that one or two new issuers could join the incumbents – DBS, OCBC and UOB – and Chen said the higher limit could facilitate this, while also attracting new investors.

“When we first came with Singaporean covered bonds, many global investors commented that the encumbrance limit and associated cap on the size of the market at some €20bn-€25bn meant that it might not be a sufficiently large market for them,” he said. “But with this increase to 10%, that certainly should make potential issuance volumes more attractive to the global investor base.”

The increase from 4% to 10% follows regular discussions between the industry and MAS, according to Chen, with the regulator having monitored the performance of the market domestically, but also with an eye on international developments.

“We have been working with them with a view to aligning ourselves with our common law peers in Canada and Australia in terms of some of the encumbrance limit discussions,” he said. “But there is also a review on how we would look compared to the EU covered bond directive, in anticipation of the third country equivalence conversations that will happen down the road.

“So this has all been done in a conservative and progressive manner and within the industry we are pleasantly surprised at how MAS has moved forward with these amendments.”

Chen noted that although the jurisdiction is mindful of European developments, there have been no discussions to expand the range of collateral backing Singapore covered bonds, which remains confined to eligible Singapore residential mortgage loans.

“The regulators appreciate that Singapore covered bonds have proven to be high quality, both from an issuer as well as from an investor standpoint,” he said, “and they want to maintain the rules that ensure that.”

Other amendments in MAS’s covered bond notice clarify encumbrance limit calculations and other aspects of the regulation, which Chen said should not affect issuance, but could help ensure uniform reporting under the Covered Bond Label harmonised transparency template (HTT).

The increase in the encumbrance limit follows moves earlier this year to further develop covered bonds’ position in Singapore.

Chen noted that covered bonds are now accepted at MAS’s Emergency Liquidity Assistance facility.

“It’s interesting that the central bank and our regulator has during the Covid-19 situation taken the opportunity to see whether they might use the covered bond product to provide banks with alternatives and support to help fund the real economy,” he said.

An update to Singapore’s insolvency framework at the end of July meanwhile included a carve-out for covered bond vehicles as well as securitisation vehicles, according to Chen.

“This is something of an alignment with best practices and European regulations,” he added.