13 August 2018
On 31 July 2018, Scope Ratings published its updated rating methodology for covered bonds.
The methodology provides for an assessment of covered bonds’s recourse to both the issuing bank and to the cover pool, which enhance covered bonds’ credit quality significantly above the issuer’s rating.
The Methodology reflects the unique status of covered bonds in a bank’s liability structure. Scope’s non-mechanistic approach to rate covered bonds takes into account:
i) the systemic importance of this bank-funding product, and
ii) the covered bond’s significance in both regulatory and supervisory frameworks as well as in central bank monetary policy.
Scope’s cover pool analysis applies a bottom-up approach that reflects the specifics of European markets.
In this update and following a call for comments, Scope further enhances and clarifies the use of the cover pool analysis. In particular, Scope clarifies its approach to assess public sector entities default risk, recovery rates and dependencies. Scope also clarifies its approach to assess the impact of market risk mismatches between the cover pool and covered bond liabilities.
Scope assigns covered bond ratings reflecting the higher of the benefit from the fundamental and the cover pool credit supports available to a covered bond issue.
The methodology therefore features three analytical steps:
For more information, download the ‘Rating Methodology Covered bonds’