| 7.29 | Covered bonds are bonds issued by a bank or mortgage institution that 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.
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Eligible assets
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| 7.30 | In order to be eligible for the risk weights set out in paragraph 7.34 the underlying assets (the cover pool) of covered bonds as defined in paragraph 7.29 shall meet the requirements set out in paragraph 7.33 and shall include any of the following:
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| | 1. | claims on, or guaranteed by, sovereigns, their central banks, public sector entities or multilateral development banks;
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| | 2. | claims secured by residential real estate that meet the criteria set out in paragraph 7.63 and with a loan-to-value ratio of 80% or lower;
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| | 3. | claims secured by commercial real estate that meets the criteria set out in paragraph 7.63 and with a loan-to-value ratio of 60% or lower; or
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| | 4. | Claims on, or guaranteed by banks that qualify for a 30% or lower risk weight. However, such assets cannot exceed 15% of covered bond issuances.
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| 7.31 | 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 this paragraph, 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.
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| 7.32 | The conditions set out in paragraphs 7.30 and 7.31 must be satisfied at the inception of the covered bond and throughout its remaining maturity.
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Disclosure requirements
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| 7.33 | Exposures in the form of covered bonds are eligible for the treatment set out in paragraph 7.34, provided that the bank investing in the covered bonds can demonstrate to SAMA that:
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| | 1. | It receives portfolio information at least on:
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| | | (a) | the value of the cover pool and outstanding covered bonds;
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| | | (b) | the geographical distribution and type of cover assets, loan size, interest rate and currency risks;
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| | | (c) | the maturity structure of cover assets and covered bonds; and
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| | | (d) | the percentage of loans more than 90 days past due; and
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| | 2. | The issuer makes the information referred to in point (1) available to the bank at least semi-annually.
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| 7.34 | Covered bonds that meet the criteria set out in paragraphs 7.30 to 7.33 shall be risk-weighted based on the issue-specific rating or the issuer’s risk weight according to the rules outlined in chapter 8. For covered bonds with issue-specific ratings10, the risk weight shall be determined according to Table 6. For unrated covered bonds, the risk weight would be inferred from the issuer’s ECRA or SCRA risk weight according to Table 7.
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| Risk weight table for rated covered bond exposures | Table 6 | | Issue-specific rating of the covered bond | AAA to AA– | A+ to A– | BBB+ to BBB– | BB+ to B– | Below B– | | “Base” risk weight | 10% | 20% | 20% | 50% | 100% |
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| Risk weight table for unrated covered bond exposures | Table 7 | | Risk weight of the issuing bank | 20% | 30% | 40% | 50% | 75% | 100% | 150% | | “Base” risk weight | 10% | 15% | 20% | 25% | 35% | 50% | 100% |
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| 7.35 | Banks must perform due diligence to ensure that the external ratings appropriately and conservatively reflect the creditworthiness of the covered bond and the issuing bank. If the due diligence analysis reflects higher risk characteristics than that implied by the external rating bucket of the exposure (i.e. AAA to AA–; A+ to A– etc.), the bank must assign a risk weight at least one bucket higher than the “base” risk weight determined by the external rating. Due diligence analysis must never result in the application of a lower risk weight than that determined by the external rating.
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