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Singapore’s 4% isn’t Canada’s 4%

26 January 2018

On a superficial level, Canada and Singapore don’t have a lot in common. But in covered bond land we look beyond the superficial (usually) and can see some remarkable market, regulatory and structural similarities.


Both have been successful, but both are constrained by a 4% limit on covered bond issuance. Which is odd given everything else that differs between the countries, most of which has a bearing on this.

Canada is a very large and (economically speaking) heterogenous country. Singapore isn’t. Whereas both countries have a handful of banks whose names are familiar to investors, in Canada these are complemented by a huge number of banks that never attend covered bond conferences and yet are a substantial part of the total residential mortgage market. The 4% limit that stops a national household name bank from issuing a full curve of covered bonds also stops the small provincial bank from even looking at the asset class in the first place. Is that anti-competitive? The limit is just a(nother) way of favouring the big national banks over the regionals? I could see that argument being used in Canada as it was for so long in Australia.

Against which Canada has a larger securitisation market – both private and CMHC supported. I know that securitisation encumbrance is different from covered bond encumbrance but surely alternative types of encumbrance in the banking system need to be taken into account when regulators impose limits? I won’t even start on non-security linked encumbrance and contingent encumbrance (credit related obligations to post collateral to clearing houses, for example) which are far more important to the overall encumbrance debate.

When it comes to a choice of currency to issue in both Canadian and Singaporean issuers are somewhat spoilt for choice. For Singapore with less deals to do this means that some markets miss out – so far most obviously the domestic currency market. There are plenty of reasons why Singaporean banks don’t want to raise term funding in Singaporean dollars, but there are also plenty of good policy reasons why they should. Singaporean investors could use more bonds, in particular the banks for the sake of their liquidity buffers. That isn’t a problem in the vastly larger and more liquid Canadian dollar bond market. It doesn’t need any help to grow.

Ultimately encumbrance limits are there to protect unsecured creditors, in particular depositors. So it must be relevant to the overall equation that Canadian depositors have twice the protection of Singaporean depositors from insurance and that Canadian banks have far more unsecured creditors in the bond market.

The huge differences between Canada and Singapore work both ways – some suggest that Canada should have the higher encumbrance limit, some Singapore. All we can really conclude is that it’s an odd coincidence that both operate currently with a 4% limit, that in both countries this limit is holding back the market and that in both countries a in-depth discussion, rather than an arbitrary number is needed.

By Richard Kemmish

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