Covered bond legislation passed by South Korea’s parliament in December provides investors with better legal protection and is also credit positive for banks, Moody’s said today (Thursday), identifying Kookmin Bank as the key beneficiary of the new law.

The legislation was passed by the legislation and judiciary committee of the National Assembly of Korea on 18 December, according to Moody’s analysts.

Korean National Assembly

They said that the law will open up a new source of low cost, long term funding and that it gives banks flexibility to secure fixed rate funding on their own, which they previously obtained by selling mortgages to Korea Housing Finance Corporation (KHFC).

The analysts believe that Kookmin Bank will be the key beneficiary of the new law, noting that the bank had the largest mortgage loan book of Korean banks as of September 2013 (Krw78tr, Eu54bn, or $73bn), translating to a market share of 24%.

Kookmin Bank is the only Korean bank to have issued covered bonds on a standalone basis, having done so in May 2009.

“We expect the new covered bond framework to allow a more regular and lower cost issuance,” said Jerome Cheng, vice president and senior credit officer, and Sophia Lee, vice president and senior analyst, at Moody’s.

Woori Bank has the second largest mortgage book, closely followed by Shinhan Bank, they added.

The Korean covered bond legislation is also positive for investors, according to the analysts, because it provides them with dual recourse rights and because issuer and collateral eligibility criteria improve the quality of the covered bonds and offer better protection.

“Protection for covered bonds investors is further strengthened through the requirements on the initial process, the ongoing management and the reporting of covered bonds,” they said, citing new measures such as a requirement to manage cover pool assets separately from other assets and keep ledgers on the cover pool, and the appointment of a cover pool monitor.