Financial and Mortgage Portfolio Overview
Breach of matching rules
requirements
A breach of the matching
requirements prior to the winding
up of the issuer in circumstances
where no additional assets are
available to the issuer or the
issuer lacks the ability to acquire
additional assets could cause
the FME to revoke the license to
issue covered bonds
If the matching requirements are
breached following the winding
up of the issuer, the winding up
committee would not be
permitted to add more assets to
the cover pool
Matching rules are there to protect the investor
The Icelandic Covered Bond Act requires issuers to satisfy a set of requirements, known as matching
rules, to ensure that the covered bond programme is able to mitigate asset-liability mismatches
Nominal Value Test
The total current value of the cover pool
which is to serve as collateral for the
covered bonds must always exceed the
aggregate outstanding amount of covered
bonds
Loans that are more than 90 days past due
are not taken into account for the
calculation of the nominal value test
Deposit set-off risk will be mitigated by
Íslandsbanki through the deduction of such
amounts from the nominal value of the
cover pool for the purposes of calculating
the Nominal Value Test, therefore
increasing the required OC necessary to
meet the test and providing additional
protection to covered bondholders
Index matching
-
to
The Bank conducts monthly tests
ensure interest matching between the
inflation-linked assets in the cover pool
and the outstanding inflation-linked
covered bonds. The Independent Inspector
has visibility over these tests and the
matching of the aforementioned generally
Liquidity coverage
Instalments and other cash flows accruing
on the cover assets in the cover pool and
from derivative agreements must be such
that at any given time the issuer can meet all
its financial obligations towards covered
bondholders and counterparties to derivative
agreements
Íslandsbanki contractually commits
funding a liquidity reserve with the amount
required to be paid on all outstanding
covered bonds in respect of interest and
third party expenses for the following 6
months
to
Cash flows from mortgages in default (90
days or more) are ignored in the calculation
and not included in the cover pool register
Asset Coverage Test
-
On each monthly calculation date the issuer
must ensure that the total value of the cover
pool, including cash, the collateral reserve
account and the liquidity reserve ledgers is
greater than: (i) the total outstanding amount
of all series of covered bonds (ii) any other
payment obligations to be paid from the
cover pool (iii) the deposit-set off amount
Net Present Value Test (interest
rate sensitivity)
On a net present value (NPV) basis, cover
assets, including derivatives, must always
exceed the corresponding value of interest
and principal of the outstanding covered
bonds, taking into account the effects of
stress-test scenarios on interest and
currency risk set by the FME
The
issuer and the covered bond
programme must be able to withstand
changes to the risk free interest rate with
respect to the net cover pool value and
ensure that the cover pool matching rules
are still met under a best and worst case
stress testing scenario
Interest rate risk: the FME defines the
stress test for interest rate risk as a sudden
and sustained parallel shift in the reference
curve by 100bps up and down
Currency risk: likewise, the FME defines
the currency risk stress test as a 10%
sudden and sustained change in the
relevant foreign exchange rate between the
currency of covered bonds and the
currency of cover assets
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August-September 2022View entire presentation