South Korea's decision to allow the introduction of covered bonds will help to diversify the Asia-Pacific regional covered bond market, which has so far been dominated by New Zealand and Australia, Fitch Ratings says.
The South Korean Cabinet approved the Covered Bond Act last week, and it is expected to pass into law in six months' time.
"We would expect Korean covered bond supply to increase as a result, although it is not clear exactly when this process will begin," Fitch said.
Covered bonds are debt securities backed by the cash flows from a specific pool of mortgages. They differ from standard bonds as investors have specific recourse to the assets that secure, or cover, the bonds in the event of default.
As is the case in Australia and New Zealand, South Korean banks will use new sources of term funding to diversify their funding base and lower funding costs, Fitch said.