This week’s €500m December 2026 from Coventry Building Society seems to have answered some questions with respect to how German bank investors treat UK covered bonds.
When the UK left the European Union, the widespread assumption was that UK covered bonds in euros would be treated on a par with those from outside the European Economic Area, these being referred to by the European Union as "third country" regimes.
In practice this meant European banks that bought UK covered bonds would remove them from Level 1b of their Liquidity Coverage Ratio portfolios and reassign them to Level 2a. This would put UK deals on a par with deals from Canada and Australia, resulting in a higher valuation haircut.
However, some German auditors took the view that, while the UK was certified as equivalent to third countries in 2021, it was not as far as the provisions of the Capital Requirements Regulation were concerned.
Referring to a document published by the European Banking Authority, they said an additional supervisory sign off was needed on a case-by-case basis for German banks to buy UK covered bonds.
But that view was at odds with the analysis of Barclays research, Fitch and some bankers who maintained that the EU had never made an official decision on covered bond regulatory equivalence for any third country, let alone the UK. Indeed, its own Covered Bond Directive specifies that the EU will not make a decision in this regard until 2024.
More importantly, in the preceding paragraph of the same EBA document it said that a case-by-case approach was “not applicable” as far as the LCR was concerned. But ultimately, actions speak louder than words.
More than 40% of Coventry’s deal was bought by German investors and 37% was sold to banks — the largest type of investor in the deal.
Auditors within Germany may continue to have different opinions but investors have voted with their feet.