Superintendent of OSFI Speaks on Covered Bonds Framework in Canada

Mr. Rudin explained that issuing covered bonds can significantly diversify a bank’s sources of funding, as these instruments differ from both bank senior debt and securitized assets in ways that can be quite important to investors. Canadian banks only began issuing covered bonds in 2007. Since issuing the first Canadian covered bond, total issuance has exceeded USD 200 billion and the level of outstanding debt has been steadily increasing. He emphasized that providing a legislative framework for covered bonds would further diversify the investor pool, as some investors choose, or are required, to hold only the covered bonds that are issued under a legislative regime. Moreover, there was a risk that relying on an untested contractual approach would make it less likely that funding would be available when most needed, in times of stress. The Canadian legal framework increased resilience by providing statutory protection for investors, enhancing disclosure requirements, and prescribing both eligible issuers and cover pool collateral. Under this framework, the national housing agency, Canada Mortgage and Housing Corporation, takes the lead role in administering the framework and maintaining a covered bond registry.

He also mentioned that OSFI supports the integrity of the covered bond framework in three ways. The first element is the broad supervision of the issuers. Currently, there are seven covered bond issuers in Canada. These issuers are subject to more intense supervisory scrutiny, higher capital requirements, stricter recovery and resolution planning requirements, and enhanced disclosure requirements. The second element is the prudential limit on the amount of covered bonds each bank can issue. Mr. Rudin mentioned that covered bonds can contribute to financial stability; however, this benefit can be undermined if the issuer sells too many covered bonds. To ensure that the financial stability benefits of covered bonds are not dissipated by excessive issuance, OSFI has applied a cap on issuance of 4% of a bank’s total assets. The third element, according him, is the cover pool assets and the role of OSFI in supervising the underwriting standards used by issuing banks. OSFI plays an important role in ensuring the soundness of the cover assets through the close supervisory scrutiny of mortgage underwriting standards in Canada. In conclusion, he highlighted that OSFI realizes the contribution that covered bonds can make to the overall stability of the banking system and will continue to support the integrity of the covered bonds framework in Canada.

Related Link: Speech

Keywords: Americas, Canada, Banking, Covered Bonds, Financial Stability, Mortgage Underwriting, OSFI