Any moves in Italy to create an instrument similar to covered bonds but backed by lending to small and medium sized enterprises would need to be done through a new law, an official at the Italian Treasury told The Covered Bond Report. He said that the Treasury is open to suggestions as to how the OBG framework could be improved, but with the caveat that its reputation should not be damaged.

Responding to a recent report that the Italian government is considering structured covered bonds, Giuseppe Forese, head of prudential regulation at the Italian Treasury, told The Covered Bond Report that the article was incorrect.

“The headline of the article was exactly the contrary of what I said,” said Forese. “In my view, it is not possible to introduce something like that because we have in Italy two kinds of instrument: we have securitisation and we have covered bonds; we don’t have something in the middle.

Giuseppe Forese

“So it would be very difficult to create through a private initiative something different.”

Forese said that were the government to look at ways in which small and medium sized enterprises could be supported, legislation could be drawn up.

“The label OBG can be used only for specific covered bonds which are in line with the very strict criteria defined by Italian law,” he said. “If we want to create some different kind of instrument – which is not named covered bonds but can be regulated by a law – in order to facilitate the access of small and medium enterprises to loans, to savings, that’s another issue.

“It could be advisable that the law facilitate this process.”

Alfredo Varrati, senior analyst, credit department, at the Italian Bankers’ Association (ABI) said that structured covered bonds would not work in Italy.

“In Italy any covered bond issued outside Law 130 of 1999, which is our securitisation law, would definitely not be an option,” he said. “There would be problems in terms of assignment of the assets to the SPV, ringfencing, clawback clauses, tax exemptions and so on.

“In other words, the way to another kind of covered bank bond would be a legislative one.”

He said that the ABI is discussing with the Treasury the idea of covered bond type instruments to finance SME lending.

“It could be a new kind of funding instrument,” said Varrati. “We would like to keep it different from the OBG as a brand – but based on the same law and the same structure.

“And we are considering loans granted to all enterprises, not just SMEs,” he added. “There would be a need for secondary regulation to define precisely the characteristics of the loans that could be included into the SPV.”

Forese said that the Treasury could consider changes to Italy’s covered bond legislation while it is making amendments necessary to reflect CRD III.

“But the fundamental framework should remain as it is, because we are convinced that this framework is still valid,” he said. “We are convinced that OBGs have a good reputation and so we shouldn’t undermine it.”

Forese and Varrati participated in a panel discussion on OBGs at an ABI/AFME securitisation and covered bond conference in Milan earlier this month where potential changes to legislation were floated, including allowing cover pool SPVs to repo assets with the ECB post-insolvency, and broadening the range of assets eligible as cover pool collateral.

Alfredo Varrati

“We like the idea of giving the post-insolvency SPV the ability to use the cover pool assets as collateral for refinancing with the ECB,” Varrati told The Covered Bond Report, “be that with the SPV taking control of the assets or via another bank which would assume the portfolio and act on behalf of the SPV for refinancing. “We are discussing its possible implementation with the Treasury.

“It is not easy because the ECB wants a solvent credit institution to do the repo agreement and our SPVs cannot qualify as credit institutions,” he added. “In this regard, the idea of having a bank assuming control of the portfolio could be a way, but it is not easily implementable. We are still discussing with our members and will later on go to the Ministry to see if they are willing to accept this idea or not.”

Forese said that it could be very difficult to achieve this goal.

“In the current Italian framework, the SPVs are not banks, and so they do not have access to refinancing facilities at the ECB,” he said. “To have access, either we can ask for a change in the ECB regulation, or we change the framework in Italy, which I consider very difficult.”

Varrati said that the proposed broadening of assets did not imply including anything “exotic”.

“When we talk about extending the type of assets available for the issuance of covered bonds, we don’t mean, for example, consumer loans or credit cards, but just for example mortgages with an LTV higher than 80% but covered for the exceeding part by eligible insurance policies,” he said. “It is just an idea; we don’t have an official position about it so far.”

Forese said that any change to the range of eligible assets would need to be done without risking any damage to the reputation of OBGs.

“We also have the limitation deriving from the CRD framework,” he added, “so we can’t choose what we want, otherwise we would be renouncing the benefits typical of covered bonds at the prudential level.”

An RMBS waiver under CRD III that allows issuers to use own-group RMBS as collateral for covered bonds – an option that has been taken up in Italy – is due to expire in 2013 and Forese said that the Ministry would consider the views of other countries and the Commission before determining its stance on whether the waiver should remain.

“My personal view,” he added, “is that after some years of application, this time limit makes no sense. This is because we are certain that there are no particular risks deriving from this waiver, because there are some very specific limits on the use of RMBS, so from a prudential point of view, their use is well defined.”

Varrati said that the ABI shares this view.

“We don’t see any kind of problem with OBGs backed by Italian groups’ RMBS,” he said.