Appendix VIII
| No: 1651/67 | Date(g): 8/9/2019 | Date(h): 9/1/1441 | Status: In-Force |
Covered bonds15
| Covered bonds are bonds issued by a bank or mortgage institution and are subject by law to special public supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest. | ||
| A covered bond satisfying the conditions set out in the next paragraph may be assigned an exposure value of no less than 20% of the nominal value of the bank’s covered bond holding. Other covered bonds must be assigned an exposure value equal to 100% of the nominal value of the bank's covered bond holding. The counterparty to which the exposure value is assigned is the issuing bank. | ||
| To be eligible to be assigned an exposure value of less than 100%, a covered bond must satisfy all the following conditions: | ||
| - | It must meet the general definition set out in the first paragraph of this appendix; | |
| - | The pool of underlying assets must exclusively consist of: | |
| • | claims on, or guaranteed by, sovereigns, their central banks, public sector entities or multilateral development banks; | |
| • | claims secured by mortgages on residential real estate that would qualify for a 35% or lower risk weight under the Basel II Standardised Approach (SAMAs local guidelines in connection there with are Basel II Package of Bank Prudential Returns and Guidance Notes Concerning Standardized Approach, 2007 and Basel II - SAMA's Detailed Guidance Document, 2006) for credit risk and have a loan-to-value ratio of 80% or lower (Note: Currently SAMA does not utilize 35% or lower RWA for mortgages on residential real estate); and/or | |
| • | claims secured by commercial real estate that would qualify for the 100% or lower risk-weight under the Basel II Standardised Approach for credit risk (SAMAs local guidelines in connection therewith are Basel II Package of Bank Prudential Returns and Guidance Notes Concerning Standardized Approach, 2007 and Basel II - SAMA’s Detailed Guidance Document, 2006 )and with a loan-to-value of 60% or lower; | |
| - | The nominal value of the pool of assets assigned to the covered bond instrument(s) by its issuer should exceed its nominal outstanding value by at least 10%. The value of the pool of assets for this purpose does not need to be that required by the legislative framework. However, if the legislative framework does not stipulate a requirement of at least 10%, the issuing bank needs to publicly disclose on a regular basis that their cover pool meets the 10% requirement in practice. In addition to the primary assets listed in the previous paragraph, the additional collateral may include substitution assets (cash or short term liquid and secure assets held in substitution of the primary assets to top up the cover pool for management purposes) and derivatives entered into for the purposes of hedging the risks arising in the covered bond program. | |
| In order to calculate the required maximum loan-to-value for residential real estate (RRE) and commercial real estate (CRE) referred to in the third of this appendix, the operational requirements regarding the objective market value of collateral and the frequent revaluation in the BCBS Basel II framework included in the next paragraph of must be used. The conditions set out in the third paragraph of this appendix must be satisfied at the inception of the covered bond and throughout its remaining maturity. | ||
| Operational requirements for eligible CRE/RRE16 | ||
| CRE and RRE will be eligible for recognition as collateral for corporate claims only if all of the following operational requirements are met: | ||
| • | Legal enforceability: any claim on a collateral taken must be legally enforceable in all relevant jurisdictions, and any claim on collateral must be properly filed on a timely basis. Collateral interests must reflect a perfected lien (ie all legal requirements for establishing the claim have been fulfilled). Furthermore, the collateral agreement and the legal process underpinning it must be such that they provide for the bank to realise the value of the collateral within a reasonable timeframe. | |
| • | Objective market value of collateral: the collateral must be valued at or less than the current fair value under which the property could be sold under private contract between a willing seller and an arm’s-length buyer on the date of valuation. | |
| • | Frequent revaluation: the bank is expected to monitor the value of the collateral on a frequent basis and at a minimum once every year. More frequent monitoring is suggested where the market is subject to significant changes in conditions and it is required for shares collateral. Statistical methods of evaluation (e.g. reference to house price indices, sampling) may be used to update estimates or to identify collateral that may have declined in value and that may need re-appraisal. A qualified professional must evaluate the property when information indicates that the value of the collateral may have declined materially relative to general market prices or when a credit event, such as default, occurs. | |
| • | Junior liens may be taken into account where there is no doubt that the claim for collateral is legally enforceable and constitutes an efficient credit risk mitigant. | |
15 Paragraphs 68-71 of BCBS "Supervisory framework for measuring and controlling large exposures" April 2014
16 Paragraphs 509 of BCBS Basel II Framework