South Korea passed its covered bonds act this month to reduce Korean households' exposure to interest rate shocks by facilitating longer-term, fixed-rate mortgage lending. It is the first Asian country to have dedicated covered bond legislation.
The framework defines eligible issuers, the segregation of the covered assets post-insolvency of the issuer, eligible assets, the appointment of an independent monitor, and regulatory reporting requirements.
The framework allows for a range of assets to be used as collateral for covered bonds, which include residential mortgages, municipal bonds, mortgage bonds or shipping and aircraft loans, Fitch said in a report.
The minimum level of collateralization is set at 105% and covered bond issuance is limited to 8% of the issuer's total assets. Liquid assets used as substitution assets are also limited to 10% of the cover pool.