Category Archives: Canadian CBs

All related to Canadian covered bonds

UK Overseas Recognition Regimes

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UK Overseas Recognition Regime

The UK Government today published a response to the Policy Update 2025 setting out HM Treasury’s approach to replacing the existing equivalence regimes inherited from the EU and in the UK CRR with legislation which is tailored to the UK’s needs, and which fully reflects the government’s outcomes-focused approach to the unilateral regulatory recognition of overseas jurisdictions. These are called ‘Overseas Recognition Regimes’.

HM Treasury explained its intention to restate existing equivalence decisions made under the UK CRR equivalence regimes so that jurisdictions currently deemed equivalent are treated as designated under the Overseas Prudential Requirements Regime (OPRR) and generally to preserve the effects of the current decisions, except regarding exposures to exchanges.

HM Treasury has today published the draft regulations for the OPRR and is seeking industry views by 2 April 2026. These regulations are intended to legislate for the approach set out below. Responses can be sent by email to Prudential.Consultation@hmtreasury.gov.uk. 

HM Treasury agrees that ensuring an appropriate prudential treatment of overseas covered bonds is important for the safety and soundness and growth and competitiveness of the UK financial services sector and the UK as a whole.

HM Treasury stated that it considers that the most timely, prudent and proportionate way to achieve these objectives in respect of the categorisation of covered bonds for liquidity purposes is to maintain the approach whereby firms are able to use certain non-UK covered bonds to meet their LCR requirements, within the criteria specified in PRA rules. The PRA statement on 15 July 2025, clarified that the PRA does not expect firms to alter their approach to the inclusion of non-UK covered bonds in Level 2A HQLA under the Liquidity Coverage Ratio (CRR) Part of the PRA Rulebook. That statement remains applicable. Since then, PRA has completed a review of the current liquidity treatment of non-UK covered bonds, and intends to consult on changes to PRA rules to confirm firms’ role in assessing the equivalence of non-UK covered bonds included in Level 2A HQLA.

HM Treasury and the PRA will work together to explore the most appropriate prudential treatment of overseas covered bonds for capital purposes. To facilitate options to address this, HM Treasury intends to introduce a power to designate jurisdictions through the OPRR for overseas covered bonds. This would allow HM Treasury, including through advice provided by the FCA and PRA, to consider whether the designation of a particular jurisdiction would advance HM Treasury’s policy objectives and introduce the most appropriate capital treatment for overseas covered bonds. The draft OPRR legislation, published today, will introduce this power in regulation 5..

Videos

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These are videos from recent covered bond conferences and other events that relate to Canadian or U.S.$ covered bonds.


ECBC Covered Bond Video Series | Denmark • ECBC

ECBC Covered Bond Video Series | Norway • ECBC

2025 SF Conversations • Fitch

European Covered Bond Directive • Euromoney

Covered bonds and securitisations are easily confused • Euromoney

TCB Roadshow 2022 | The implications of growth: Canadian covered bonds in 2022 and beyond

Mayer Brown Webinar • 2020
Covered Bonds Update in the United States
Jerry Marlatt and Laura Drumm

US $ covered bonds – back again • Euromoney 2019

Equal treatment for non-EU covered bonds? What’s needed? • Euromoney 2018

Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Concerns about the Covered Bond Directive.

Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Outlook for the Canadian covered bond market and prospects for the U.S. market

Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Impact of MREL and TLAC on covered bond issuance.

Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Keynote Address by Sandra Johnson, FHFA

Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Interview with Sandra Johnson, FHFA

Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Interview with Jerry Marlatt on "What Hope for America".

Congressman Jeb Hensarling On Covered Bonds • 2010

Congressman Scott Garrett On Covered Bonds • 2010

Garrett Introduces Covered Bonds Amendment • 2010


Resiliency of Canadian Covered Bonds

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Resiliency of Canadian Covered Bonds

In the current world of sharply rising interest rates and a possible recession, questions have arisen about the resiliency of the cover pools for Canadian covered bonds. Additional focus is brought to this question by the declining housing values in Canada — Vancouver and Toronto in particular have seen reported 15 to 20 per cent declines in house prices from recent peaks.

Canadian covered bonds take their strength from several factors, not the least of which is the conservative nature of property investors in Canada, combined with fairly strict underwriting standards set by OSFI. This has resulted historically in a typical annual loss rate for residential mortgage pools for most banks in basis points in the single-digit or low double-digit range.

This low loss experience is supported by the full recourse nature of Canadian mortgage loans. A mortgagor under Canadian law is personally liable for full payment of the mortgage loan if the loan is foreclosed on and liquidated at a loss. Unlike the case in many U.S. States, a Canadian property owner cannot turn over the keys to house and walk away free of the debt.

Another protection for Canadian cover pools is the monthly Asset Coverage Test that each program must pass. If the value of eligible mortgage loans in the cover pool does not exceed the outstanding amount of covered bonds by the required overcollateralization amount, the test is failed. Defaulted mortgage loans are not included in test. If the test is failed, the issuing bank is required to transfer additional, non-defaulted eligible mortgage loans to the cover pool. Thus, the cover pool is constantly refreshed with performing mortgage loans protecting the value of collateral backing the covered bonds.

More protection is provided by the requirement that an eligible mortgage loan for Canadian cover pools must have a loan to value ratio not exceeding 80%, measured each month based on an index of current property values in the location of the property. If the loan to value ratio exceeds 80% at any time, only only the portion of the loan not exceeding 80% of the value of the property is included in the cover pool for the calculation. This means that the value of the cover pool is protected from declining property values.

Moreover, the typical average loan to value ratio of mortgage loans in cover pools for Canadian covered bonds is between 50% and 60%, which provides a substantial buffer before loan amounts are reduced in the cover pool because they fail the loan to value maximum for eligibility. Statistical information on cover pools is available in the monthly report provided to investors by each of the Canadian banks.

Lastly, in addition to strong cover pools, investors in Canadian covered bonds hold exposures to banks that operate in a conservative banking environment. Canadian banks came through the financial crisis of 2008 in excellent shape and continue to be highly regarded in international capital markets. Banking regulation in Canada contributes to the conservative environment with a with a regulatory approach that prioritizes stability. The recent tightening of mortgage loan underwriting evidences this caution.

This collection of protections is what supports the perception of quasi-sovereign risk for Canadian covered bonds.

Stellar Year for Canadian Covered Bonds

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A Smashing Year for the Canadians

2022 was a remarkable year for Canadian covered bond issuers. The Canadians issued 68 series of covered bonds in 2022 for an equivalent total of C$100,515 million, more than doubling the 30 offerings of 2021. There were 58 offerings in 2020, but 25 of those were retained offerings for repo with the central bank, so don’t count as public offerings.

In 2021, the Canadians were 20 per cent of the global market in covered bond issuance. While the final numbers for 2022 are not yet available, with 68 offerings it is likely that the Canadian banks have not slipped from that position.

In 2022, the Canadians issued in six different currencies: USD, A$, C$, CHF, £, and €. Euro was the most popular currency, with 29 offerings for €32,368 million, followed by the USD with 14 offerings for $24,705 million. RBC was the most active issuer with 18 offerings, followed by BNS with 14 offerings.

Some of the motivation for issuance likely was replacing funding obtained at the beginning of the pandemic from the Canadian central bank in 2020, when about C$90,000 million of covered bonds was taken to the central bank by the Canadian banks. Most of those loans from the central bank were two-year loans.

The elevated Canadian covered bond issuance was also responsible in large part for the largest U.S. dollar covered bond issuance since 2012. With a total U.S. dollar covered bond issuance of $32,500 million in 20 offerings in 2022, the Canadian banks accounted for $24,705 million in 14 offerings, well above their typical 50% of the market.

In 2023, Canadian banks have 43 series of covered bonds maturing, 16 of which are in euros and 13 in Canadian dollars. Of the maturing Canadian dollar series, ten of the series, representing C$33,500 million, were retained covered bonds transferred by repo to the central bank. With so many series maturing next year, it likely that 2023 is going to be another very active year for Canadian banks in covered bonds.

1Q22 – A Blistering Pace in 1st Quarter

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A Blistering Pace in 1Q22

It was a notable first quarter for Canadian covered bond issuers: 19 issuances across dollars, sterling and euros [see the table below].  All six of the major Canadian banks issued bonds.  On a Canadian dollar equivalence basis, the banks issued C$38.7 billion. Continuing a trend set last year, the Canadians represented 20% of covered bond offerings for the quarter — punching well above their weight. This activity is probably partly attributable to the heavy retained issuance by the banks at the start of the pandemic in March and April 2020, when nearly C$90 billion was taken to the central bank for funding. This was the inaugural covered bond repo program by the central bank. Issuance limits were temporarily increased at the time to support the central bank program and provide enhanced liquidity to the banks. Most of those covered bonds had two year maturities and are running off this year.
Pricing Issuer Series Cur. (mm) Coupon Maturity Tenor Spread Type
2022-03-30 National Bank of Canada CBL18 $ 1250 2.900 2027-04-06 5yr +65 144A
2022-03-29 Bank of Montreal CBL28 € 1750 1.000 2027-04-05 5yr +8 Reg S
2022-03-17 Toronto-Dominion Bank CBL34 € 2500 0.864 2027-03-24 5yr +11 Reg S
2022-03-17 Royal Bank of Canada CB69 € 150 1.296 2037-03-24 15yr +15 Reg S
2022-03-17 Royal Bank of Canada CB70 $ 1500 2.600 2027-03-24 5yr +65 144A
2022-03-15 Royal Bank of Canada CB68 € 2000 0.625 2026-03-25 4yr +9 Reg S
2022-03-08 Bank of Nova Scotia CBL42 € 2000 0.450 2026-03-16 5yr +10 Reg S
2022-03-03 CIBC CBL40 $ 100 SOFR+45 2025-03-10 3yr +45 144A
2022-03-03 CIBC CBL39 € 2500 0.375 2026-03-10 4yr +6 Reg S
2022-03-02 Bank of Nova Scotia CBL41 $ 2250 2.170 2027-03-09 5yr +58 144A
2022-03-02 Bank of Montreal CBL27 £ 600 SONIA+40 2027-03-09 5yr +40 Reg S
2022-02-02 Bank of Nova Scotia CBL36-2 € 100 0.623 2041-10-15 20yr +16 Reg S
2022-02-01 FCDQ CBL14 € 750 0.250 2027-02-08 5yr +5 Reg S
2022-01-20 National Bank of Canada CBL17 € 1000 0.125 2027-01-27 5yr +5 Reg S
2022-01-19 Bank of Montreal CBL26 € 2750 0.125 2027-01-26 5yr +6 Reg S
2022-01-18 Royal Bank of Canada CB67 € 2000 0.125 2027-01-25 5.25yr +6 Reg S
2022-01-17 Bank of Nova Scotia CBL39 £ 1300 SONIA+100 2026-01-26 4yr +28 Reg S
2022-01-17 Bank of Nova Scotia CBL40 € 1250 0.375 2030-03-26 8yr +10 Reg S
2022-01-11 CIBC CBL38 $ 2500 1.846 2027-01-19 5yr +48 144A/Reg S

Covered Bonds – Flight to Quality

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Critical Liquidity Source in Times of Stress

In the past ten days, covered bonds have shown their value in a crisis for the Canadian banks. They have issued covered bonds in Europe at least seven times in that last ten days. When senior debt and ABS is difficult to bring to market, covered bonds have a ready investor base. Covered bonds represent a flight to quality when markets are difficult. The Canadians have been so successful that they have irritated European funding officials. See the story in Global Capital.

Canadian banks survived the last financial crisis in better condition than perhaps any other OECD banking system. And the Canadian banking system, although relatively small, remains one of the preeminent banking systems in the world. The six major Canadian banks dominate the banking market in Canada. They are quite conservative. They tend to follow each other and particularly the traditional leader, Royal Bank of Canada. Compared, for example to the banking system in the United States, the Canadian banks have had remarkably few crises. It is a close-knit community and a comfortably profitable business in Canada.

When the crisis created by the coronavirus COVID-19 began to envelope the Western world, the Canadian banks moved quickly to shore up their liquidity. An important tool for accomplishing this has been covered bonds. In uncertain times, investors tend to seek sovereign paper in a flight to quality. Covered bonds provide an attractive alternative to sovereign paper. Covered bonds have a similar risk profile to sovereign bonds but generally provide better yields.

Why did the banks choose Europe to issue their bonds? Because of favorable currency swap costs. And the market proved quite receptive. Even though there were at times two or three Canadian banks in the market at same time, they all managed to issue benchmark-size offerings at favorable rates. There was clearly an investor hunger for safe assets with a decent yield and the Canadians met that need quickly. They were in and out of the market before their European competitors had even contemplated challenging the market turmoil.

And although the Canadians deserve credit for moving quickly, the moral of the story is really the value of covered bonds in stressful times. As it did during the financial crisis, the covered bond market continues to be open and available to provide critical liquidity when other finding sources are spotty or not available at all. And just to note, this is a funding tool that U.S. banks do not have access to.

Reg AB II — BNS SEC Filing Expires

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BNS SEC Filing Expires

On September 9, 2016, the SEC registration statement of Bank of Nova Scotia for its covered bonds expired without renewal.*  This was followed by the pricing on September 13, 2016, of a $1.5 billion offering of five year covered bonds by BNS in a 144A private placement.  Apparently BNS, like BMO, has abandoned the SEC registered format for its covered bonds. 

On inquiry, BNS stated that …….  This action now leaves Royal Bank of Canada as the sole Canadian bank with an SEC registered covered bond program.* 

The RBC program was inaugurated in September 2012 to much acclaim.  While RBC has not publicly stated what action it will take regarding the loan-level disclosure requirements imposed under Regulation AB starting in November 2016, the response of BMO and BNS suggest that there may be no further issuances of SEC registered covered bonds after November.  This will certainly be a disappointment to investors and will increase the funding costs of the banks.

Reg AB II — BMO Abandons SEC Filing

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BMO Abandons SEC Filing

On December 16, 2015, Bank of Montreal quietly withdrew its SEC registration statement for covered bonds.  The registration statement became effective on November 8, 2013.   The registration statement was originally filed in July 2013.   Prior to the filing, BMO had obtained a no-action letter from the SEC staff to permit the Guarantor to register its Guarantee on the same shelf registration statement as the bond to be issued by the bank. 

On inquiry, BMO reports that there were a number of reasons for their withdrawal of the registrations statement.  One of the reasons for the withdrawal was the prospect of needing to comply with the loan-level disclosure requirements of Regulation AB beginning in November 2016.   That compliance requirement arose from the conditions imposed on BMO by the no-action letter.   BMO cited the uncertainty of its ability under Canadian law to provide the information required and the significant cost of altering its systems nationwide to collect the information.

This is the first of the three Canadian banks with SEC registration statements to react publicly to the new loan-level disclosure requirements imposed by the SEC.   (See Regulation AB II and Canadian Covered Bonds– the end of SEC registered covered bonds?).   This action suggests that the other two banks, Bank of Nova Scotia and Royal bank of Canada, may cease issuing SEC registered covered bonds by the November 2016 date.   Neither of the two banks, however, has publicly stated its intent in this regard.

EU Covered Bond Framework

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EU Covered Bond Framework

December 2019 saw the enactment in European Union of a Covered Bond Framework consisting of a Covered Bond Directive and a Covered Bond Regulation to harmonize covered bond legislation across the Member States of the EU. Member States are required to adopt and publish laws, rules and regulations by July 8, 2021 necessary to comply with the Directive, which shall be effective not later than July 8, 2022. Covered bonds compliant with the Covered Bond Directive are treated preferentially under the Capital Requirements Directive (as amended by the Covered Bond Regulation) and may qualify for credit quality step 1 under the Liquidity Coverage Requirement Regulation. Covered bonds are defined under the Directive to be covered bonds issued by credit institutions subject to the Capital Requirements Directive. Accordingly, covered bonds issued by Canadian or Australian or other third-country issuers of covered bond will not qualify for preferential treatment under the Capital Requirements and will therefore be less attractive to investors that are EU credit institutions than covered bonds issued by EU credit institutions. This disadvantage is addressed under the Directive by a requirement that “[t]he Commission should therefore, in close cooperation with EBA, assess the need and relevance for an equivalence regime to be introduced for third-country issuers of, and investors in, covered bonds”. And that “[t]he Commission should, no more than two years after the date from which Member States are to apply the provisions of national law transposing this Directive, submit a report thereon to the European Parliament and to the Council, together with a legislative proposal, if appropriate.” The report of the Commission on the need for an equivalence regime therefore needs to be delivered to the European Parliament no later than July 8, 2024. There is no basis to predict when equivalence legislation, if any, might be adopted. The bottom line is that third-country issuers from Canada, Australia and other jurisdictions are likely to be at a disadvantage until at least 2025.

Regulation AB II and Canadian Covered Bonds — the end of SEC registered covered bonds?

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The recent amendments to Regulation AB (commonly referred to as “Reg AB II”) were a policy response to the perceived inadequacy of securitization disclosure prior to the financial crisis and a response to a request by very large investors for extensive, detailed information about the assets in a securitization.  The adoption of the changes to Regulation AB was only possible after the SEC negotiated protection from the Consumer Financial Protection Bureau (the “CFPB”) for issuers filing the data required by the SEC.  The CFPB statement provides that an issuer filing data in accordance with the SEC rules will not be in violation of the financial privacy laws. 

The result of the amendment is a package of regulations that call for the disclosure of loan-level data that varies by asset class.  In the case of assets that are residential mortgage loans, the rules call for the disclosure of 272 data fields for each mortgage loan, including the first two digits of the postal zip code for the property. 

In a study conducted by the SEC staff prior to the adoption of the amendments, the staff calculated that disclosure of the full five digit postal zip code for a property would result in an 80% likelihood that the identity of the borrower would be discernable.  With the reduction to disclosure of only the first two digits of the postal zip code, the staff concluded that there was still a 20% likelihood that a borrower could be identified.  Thus the need for the SEC to obtain CFPB protection for issuers. 

But what has this to do with covered bonds? After all, covered bonds are not securitizations, but rather special form of secured debt.  The answer is somewhat complex. 

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OSFI to Reconsider 4% Limit?

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According to reports in The Cover and The Covered Bond Report, Canada is considering whether to increase the 4% limit imposed on covered bond issuance. This limit was imposed by the Office of the Superintendent of Financial Institutions (OSFI) at the inception of covered bond issuance by Canadian banks in 2007 and remains unchanged today. While the limit is the most stringent currently applied in the covered bond world, Canadian banks have nevertheless been active issuers of covered bonds as can be seen by the table below.

US$ EUR GBP CHF A$ C$
Issued (mm)*71,60044,0374,3752,0757,4504900
Outstanding (mm)*39,60038,6134,3751,4005,1003,300

Source: www.us-covered-bonds.com/cdn_issue_details
* As of January 28, 2016.

The current 4% limit is measured as the Canadian dollar equivalent amount of covered bonds outstanding divided by total assets. The table below shows the covered bond issuance capacity remaining for each Canadian covered bond issuer as of December 2015.

BMO BNS CCDQ* CIBC NBC RBC TD TOTAL
Total Assets (mm)**641,881856,4971,318463,309216,0901,074,208862,5324,115,835
Maximum Amount (mm)26,10033,6007,40018,2008,30043,50042,400179,700
Outstanding Amount (mm)11,60022,2005,40010,7007,30031,30020,900109,400
Used Capacity44.3%66.0%73.1%*59.0%87.8%71.6%60.9%60.9%
Remaining Amount (mm)14,50011,4002,0007,5001,00012,40021,50070,300

Source: CMHC, Covered Bond Business Supplement, September 2015.
*Note that CCDQ is subject to a different limit, which is set by Autorite&#769 des marche&#769s financiers at EUR 5.0 billion.
** As of October 31, 2015.

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BNS Files U.S. Prospectus

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BNS initially filed its registration statement for its legislative covered bond program on Form F-3 with the SEC on May 31, 2013. That registration was declared effective on September 9, 2013. However, BNS did not file a prospectus under the registration statement with the SEC until today, August 20, 2014. In the interim, BNS filed a prospectus with the UKLA and offered covered bonds in Europe on March 26, 2014. Now, with the filing of a prospectus with the SEC, BNS is ready to offer covered bonds in the U.S.

Year to date, the U.S. covered bond market has been very quiet. Only two issuers have brought bonds to market for a total of $3 billion: Westpac Banking Corp. on May 14 and Commonwealth Bank of Australia on June 14, both privately placed offerings. So far, no registered covered bonds have been issued in the U.S. in 2014.

Moody’s expects lower predictability of government support for Canadian banks; changes banking system outlook to negative

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On July 8, Moody’s followed up on its June 11 announcement regarding risk related to a “bail-in” regime in Canada with an announcement of the change to “outlook negative” in Global Credit Research.  Additionally, Moody’s notes that “high household indebtedness and elevated housing prices remain key risks to banking system stability in Canada”.  Further, Moody’s states that “growth sought by the banks has led them to diversify into riskier businesses and geographies which dilute their strong domestic credit profiles and represent a growing risk to the Canadian system’s stability”.

Moody’s: Canadian Banks on Outlook Negative

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On June 11, 2014, Moody’s Investors Service changed the outlook of the seven largest Canadian banks from stable to negative and confirmed each of their long-term ratings.  Moody’s stated that the action was taken in response to previously announced plans of the Canadian government to implement a “bail-in” regime for Canada.  In Moody’s view, the balance of risks for senior debt holders and uninsured depositors of Canadian banks “has shifted to the downside.”

This rating action by Moddy’s has not affected the rating of any outstanding covered bonds issued by the banks.  The current long-term ratings of the banks by Moody’s range from Aa3 to Aa1.