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Type Master's Thesis
Scope Discipline-based scholarship
Title An Examination of Ratings of Covered Bonds
Organization Unit
Authors
  • Marc Meili
Supervisors
  • Kjell G. Nyborg
  • Jiri Woschitz
Institution University of Zurich
Faculty Faculty of Economics, Business Administration and Information Technology
Number of Pages 78
Date 2013
Abstract Text Covered Bonds are an important source of refunding for banks in Europe and have recently become popular in countries like Australia, New Zealand and US. Covered bonds currently represent the second largest asset class just after sovereign bonds in almost every European country. The total amount of outstanding covered bonds is currently approximately 2.4 trillion euro. The current discussion about the asset encumbrance has increased voices for an issuance limit for banks in the European countries. This paper discusses how the common rating agencies produce their ratings and examines their approaches of rating covered bonds. As the rating agencies publish a lot of information about their methodology but do not disclose how the rating is generated, one goal of this paper is to show how the unadulterated pool data , the legal frameworks, the issuer rating, the rating of the country the issuer is based in and the general structure have an influence on the covered bond rating. Furthermore, it examines how the rating agencies analyse this data to be able to produce a rating. The three big rating agencies are paid by the organisations whose debt they rate. Due to this conflict of interest the independence of these ratings is questionable. Today, there are still high barriers to market entry and the market structure can best be described as an oligopoly. I expect that this fact is mirrored in the rating distribution and in the scores derived by the rating agencies to describe the cover pool. Therefore, it might be possible to generate a rating approach that is able to produce ratings which are leading. Several parameters such as the LTRO introduced by the ECB in 2011 and the issuance limits of covered bonds have an influence on the covered bonds and their ratings. In this paper I try to show some of these effects. As mortgage covered bonds have become much more important than public covered bonds over the last years, the latter are not treated in this thesis.
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