FSA's Huertas Said Bank Supervisors Should Monitor Encumbrance
Dow Jones Newswires
14 Jun 2011
Mark Brown
BRUSSELS -(Dow Jones)- Banking supervisors need to monitor whether banks put some of their creditors at risk by pledging
assets to others, an official at the U.K. financial regulator said Tuesday.
Thomas Huertas, director of banking sector at the U.K.'s Financial Services Authority, said that there is a limit to the
amount of collateral that banks can use to back some bond issues without putting depositors at risk.
According to him, this includes covered bonds and certain types of asset-backed securities.
Covered bonds are highly-rated bank bonds backed by a pool of mortgages, or public sector loans, which stay on the
issuing bank's balance sheet.
Minimum legal standards are set to ensure that only good quality loans can be assigned to the "cover pool" backing the
bonds.
Some commentators have noted that the high level of covered bond issuance by European banks since the financial crisis
raises the risk of "encumbrance," meaning that so many of a bank's highest quality loans are ear-marked for covered bond
investors.
If the bank went bust, other creditors would be worse off as a result.
Market participants say this point is a long way off, though.
"There is evidence that some investors now treat covered bonds as if they were senior" to unsecured bank debt, Huertas
said.
"I think it is something that will enter into the general supervisory review of a bank's funding," he said.
Huertas added that it was possible that supervisors might set a limit on how much collateral a bank could pledge to
certain bond investors.
"There may come a point at which a number is decided," he said.
Huertas comments were made during a presentation at the Global ABS 2011 conference in Brussels.
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