The practice of rating covered bonds

This article analyses and compares the rating of covered bonds in the practice of the five credit rating companies which have 90% market coverage in the rating of European covered bonds (Moody’s, S&P, Fitch, DBRS and Scope). The rating of covered bonds tends to be excellent, it can even be significantly better than that of the issuing bank or that of the country in which the bank is located. The main reason for this are the different lines of defence laid down in regulation, which are also supported by the large-scale covered bond purchasing programme of the European Central Bank on the market’s side. The question is whether these lines of defence can really be deployed with full effectiveness in the event of significant turbulence in the real property market or a systemic banking crisis or a sovereign crisis, i.e. whether the current practice of the rating of covered bonds is not too optimistic.