Published Date: 08 March 2023

"Opportunities and Partnership for a Strong and Resilient Covered Bond Market" - Speech by Mr Lim Cheng Khai, Executive Director, Financial Markets Development Department, Monetary Authority of Singapore, at The Asian Covered Bond Roadshow on 8 March 2023

Luca Bertalot, Secretary General, European Mortgage Federation and European Covered Bond Council

Distinguished guests, ladies, and gentlemen 

1. Good afternoon. It is my pleasure to join you here today at The Asian Covered Bond Roadshow 2023 - the first physical comeback of this event in Singapore in four years.  

Resilience of the Covered Bond Market

2. Since we last gathered together in 2019, financial markets globally and in the region has gone through a period of heightened uncertainty.  The market conditions also had implications on bond issuance activity.  

  • 2020 and 2021 saw record-levels of bond issuances.  This was on the back of the extraordinary monetary policy easing by major central banks to cushion the economic impact of COVID-19 related lock-downs.  Full year global corporate bond issuances grew 24% to hit US$ 9 trillion in 2020, and the same volume was repeated in 2021Dealogic
  • In 2022, we saw a stark reversal. Major central banks hiked interest rates aggressively to rein in persistent inflationary pressures due to supply chain disruptions, which were worsened by the Russia-Ukraine War. Investors also kept a close eye on geopolitical and macroeconomic risks, and governments, corporates and businesses cut back on their funding needs. As a result, issuances dropped 26% to US$ 6.6 trillion in 2022. 

3. Despite the challenging macroeconomic backdrop and the slowdown in overall bond issuances in 2022, the global covered bond market bucked the trend. In contrast to the double digit decline in the global bond market, covered bond issuances saw a growth of 16% globally, reaching US$ 491 billion by the end of 2022. Banks tapped the covered bond markets for funding post-pandemic, on the back of slower growth in deposits funding and tightening of central banks’ monetary policy.

4. The growth in the Asia ex-Japan covered bond market was also remarkable.  Asian covered bond issuances grew by 86% to reach US$ 34.5 billionDealogic, DBS in 2022, the highest level in the last decade. This was driven by the Australian banks switching from central bank facilities to the covered bond market for stable funding. 

5. Further, sustainable covered bonds have grown in popularity. This is in line with the broader emphasis towards sustainable developments. In 2022, more than US$ 25 billion of sustainable covered bonds were issued globally, in different currencies. This is more than 3 times the volume of the sustainable covered bond market in 2018Dealogic .  Based on statistics released by the European Covered Bond CouncilECBC: European Covered Bond Fact Book 2022 , most of these sustainable covered bonds are linked to energy-efficient buildings and affordable housing. As the paradigm of sustainable investing takes hold among investors, issuers will have to build up capabilities to issue sustainable covered bonds to meet investor demand. 

Development of the Singapore Covered Bond Market

6. Singapore’s covered bond market has also grown significantly in recent years. Our journey can be traced back to 2015.  In June that year, MAS updated our rules to make it more conducive for the issuance of covered bonds. As a sizeable proportion of residential properties and mortgages in Singapore are public housing and financed in part by borrowers’ monies in the government public pension system, or the Central Provident Fund, we tweaked our rules to remove the friction for such residential mortgages to be securitised.  Shortly, DBS became the first local bank to establish its US$ 10 billion global covered bond program. It then issued its first covered bonds amounting to US$ 1 billion in the same year. UOB and OCBC followed and by the end of 2022, these banks have issued 29 covered bonds of close to US$ 22 billion in total, in multiple markets and currencies. 

7. In 2020, we enhanced our covered bond regulations and central bank collateral policy, and this gave a further boost to our covered bond ecosystem. We raised the asset encumbrance limit on locally incorporated banks from 4% to 10% of their total assets, and also included covered bonds as eligible collateral for banks to access MAS’ liquidity facilities. In tandem with these measures, covered bond issuances in Singapore increased by close to 4 times to US$ 4.3 billion in 2021, compared to 2020Dealogic, DBS .

8. The growth of our covered bond market has brought about two key benefits to market participants. First, covered bonds have proven to be a reliable funding and capital recycling tool for Singapore banks at a relatively low cost.  Issuing banks enjoy cost savings of around 24 basis pointsEstimated based on the average difference between 5Y USD covered bonds vs. USD senior debt since 2016. based on recent comparable yield differences in the US markets. Further, covered bonds are stable, high quality debt instruments where issuers can remain confident of investor demand regardless of the market cycle. It offers issuers the opportunity to diversify their investor base to include more central banks, official institutions and bank treasuries. For example, in 2022, UOB capitalised on its strong pool of cover pool assets, and printed the largest Singapore EURO-denominated covered bond at EUR 1.5 billion.  The transaction was oversubscribed with orders from central banks, official institutions, insurers and pension funds. The strong investor demand is testament to their confidence in the quality of our local banks’ assets, even amidst the challenging market backdrop in 2022.

9. For investors, covered bonds offer access to a safe investment backed by high quality assets. The covered bonds of Singapore banks carry the Covered Bond Label. This designation from the Covered Label Foundation recognises issues that come with an enhanced level of transparency that is comparable to the standards in the European covered bond market. We have been a supporter of the Covered Bond Label in its early days, and Singapore is the first country outside of the European Economic Area to subscribe to the label in June 2015. In addition, investors of Singapore-issued covered bonds can pledge them as collateral to access MAS SGD term facility during periods of market stress.  

10. More recently, we have taken another step to support the growth of this asset class. The Minister for Finance announced as part of Singapore Budget 2023, the introduction of a new sub-scheme under the existing Approved Special Purpose Vehicle or ASPV scheme for covered bonds. This scheme took effect on 15 February this year, and will last for 5 years until the end of 2028.  It provides further clarity on tax treatment such as the exemption of specified income derived by the issuing banks from covered bond transactions. This will give more certainty to issuers on the tax treatment, and facilitate more issues of covered bonds by banks in Singapore. 

Prospects in Asia 

11. There are also regulatory developments in the covered bond market globally that present opportunities for us. The EU Covered Bond Directive became fully effective in July last year, and sets out how the principles for the third country equivalence regime is to be developed. The EU Covered Bond Directive now supports a ‘global’ principles-based approach for covered bonds. It presents an opportunity to harmonise the covered bond frameworks outside the EU, and potentially allow Asian covered bond issuers to access EU-based investors. We strongly encourage our industry players to provide feedback to the EU authorities in the development of this equivalence regime, to widen market access for our Asian covered bond issuers.   

12. We are also grateful for the support that industry players have given to the development of the Singapore Covered Bond Market. For example, the ABS Covered Bond Committee, set up in 2015, has played a key role in helping us refine our rules and regulatory framework over the years. We also have a strong partner and advocate in the European Covered Bond Council, which has always provided an important platform for us to keep abreast of global developments in this asset class. These regular engagements and partnerships have led to greater transparency, reliability, and international convergence within and outside of the EU. With this collaboration with industry stakeholders, MAS is confident that we will continue to grow our covered bond market and maintain its attractiveness to issuers and investors. 

13. I thank you once for inviting me this afternoon, and wish you have an engaging and enjoyable day ahead.