Taiwan should introduce laws for the sale of covered bonds, which are backed by mortgage loans or other bank assets, to help lenders raise funds as Europe’s debt crisis dampens demand for riskier assets, Standard & Poor’s (S&P) said.
Covered securities, issued by financial institutions, are becoming more popular in the Asia-Pacific region, with Australia and New Zealand leading in developing related legislation, S&P analysts led by Taipei-based Andrea Lin wrote in a report.
Singapore and South Korea are also considering drafting such rules, according to the report.
The bonds are typically rated investment-grade because they are backed by assets that stay on a bank’s balance sheet and can be sold in the event of a default.
“There’s a surge in local market interest in covered bonds as we’re seeing more issuance worldwide,” Lin said by telephone yesterday.
Covered bonds provide additional funding flexibility, which could become more important to Taiwanese issuers amid increasing global capital market volatility and investors’ diminishing risk appetite, according to S&P.
“It’s a good funding alternative, but first of all, Taiwan needs to remove the obstacles and set up a supportive legal framework first,” Lin said.
Outstanding covered bonds worldwide amounted to US$3 trillion as of last month, the ratings agency said.