Covered bonds: limited harmonisation and common definition 

Press Releases 
  • Covered bonds should be harmonised at the EU level without disrupting properly functioning national models
  • Common definition of covered bonds providing for an equal quality of assets
  • Minimum supervisory standards across the EU

Covered bonds worked well in the EU markets thanks to national rules therefore EU level harmonisation should be limited and focused on enhancing the CBs’ quality.

Plenary voted on Tuesday on an own - initiative report on covered bonds (CBs), calling on the Commission to present a principle-based Directive for an European Covered Bond framework. The Commission had indicated in its recent CMU mid-term review that it could present such a legislative proposal as early as Q1 2018.

CBs are instruments with a long-established track record of low default rates and reliable payments, they played a key role in the funding of credit institutions, in particular during the crisis, when they retained high levels of security and liquidity.

Limited harmonisation at the EU level

MEPs believe that covered bonds work well in EU markets being diversified and sound products thanks to some very successful national frameworks. They are concerned that a mandatory and comprehensive harmonisation aiming at a one size fits all European model would have negative consequences, therefore they proposed a limited principles-based approach based on high quality standards and best practices but leaving means and ways to member states.

Common definition of covered bonds

However, MEPs also believe that a common definition of covered bonds imply a transition to a three-tier market: some covered bonds would become Premium Covered Bonds and others stay Ordinary Covered Bonds. In addition, they also propose creating a new category of European Secured Notes (ESNs) consisting of non-government-backed infrastructure investments or credits to small and medium-sized enterprises (SMEs).

PCBs, OCBs and ESNs would share common basic features: being fully backed by a cover pool of assets, with a full payment obligation and an equivalent priority claim in the of the issuer’s default. In order for the value of cover pool assets to be always greater that the value of outstanding payment obligations, the valuation methods should be clearly defined in national laws.

Minimum supervisory standards

In their vote MEPs call on all member states to integrate special public supervision and transparency requirements into their national law with an aim to achieve supervisory convergence across the EU. They also propose developing “harmonised standards and templates for disclosure to facilitate the comparison and the analysis of differences between covered bonds across the EU”.

The resolution was approved by 543 votes to 99, with 56 abstentions.

“The covered bonds have been a very successful debt instrument for more than 200 years. Their success relies on the existence of two factors: high quality collateral and supervisory framework, the EU law has granted a preferential treatment to cover bonds over other assets. This is only justified if the collateral is high quality, however the union law lacks a clear definition of covered bonds (CBs). (....) We would like to distinguish between premium covered bonds and ordinary covered bonds, where the premium covered bonds are those which satisfy the higher criteria on the quality of assets”, said the rapporteur Bernd Lucke (ECR, DE) during the debate before the vote.