U.K. regulatory body Financial Services Authorities said last week in a letter to the British Banker's Association that it will make decisions on covered bond issuance on a case-by-case basis and reiterated that the limit for banks will be roughly 20% of all assets. Regulators will also leave the risk weightings for these instruments at 20%.
The FSA said it realized that the refinancing advantages and greater liquidity that covered bonds offer exceeds the risk of individual depositors suffering losses. The FSA's previous position on covered bonds was contained in a letter to the British Bankers' Association last August, in which it warned that heavy covered bond issuance could lead to more strict capital requirements placed on banks by the FSA. In the letter, the FSA suggested that even 4% of a bank's total assets sold as covered bonds might be excessive. But a number of the U.K. banks, actively issuing these instruments - Abbey National, Bradford & Bingley, HBOS and Northern Rock all have programs - have long since passed the 4% threshold.