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EU Commission covered bonds consultation: ESBG response

EU Commission covered bonds consultation: ESBG response

Challenges could arrive to achieve covered bonds common harmonisation, including EEA legal framework diversity.

>> See entire ESBG response to consultation (.pdf)

Published on website: ​​BRUSSELS, 14 January 2015





ESBG believes that there could be challenges to achieve a common harmonisation of covered bonds, one of them being the diversity of legal frameworks in the EEA, including the diversity of insolvency legislation and mortgage legislation across the European countries. This diversity in legal frameworks can be seen as an advantage from the individual issuer and investor perspective, reflecting what is considered best practise in the different jurisdictions. On the other hand, a greater convergence in covered bonds frameworks will enhance transparency, and support the rationale of preferential risk weighting whilst at the same time make it easier for investors to take more informed investment decisions and hence reduce the country bias.

ESBG appreciates that the recommendations in the EBA’s report were quality-oriented. We believe that high-quality standards are essential for the success of the covered bonds product. Expanding the categories of eligible asset classes beyond public sector loans, residential and commercial mortgages may lead to the dilution of the covered bond concept. This may in turn reduce confidence in covered bonds and reduce the attractiveness of the instrument for investors, issuers and government institutions (financial stability).

We see little to no possibility of a profound change on consolidated European level for as long as the necessary changes in bank insolvency laws are not finalized and have taken effect. Prior to that any European consolidation on covered bond legislation will have to take into account all respective national insolvency regulations and will therefore create little to no convergence from an investors perspective as treatment under insolvency (e.g. dual recourse, segregation from ordinary insolvency proceedings, exclusion from bail-in tools) and the resulting low risk costs still remains one of the main selling points of European covered bonds.

Sound coordination between the legislative framework on securitisation and the other initiatives within the CMU Action Plan is important, as the regulatory regimes must adequately reflect the different risk/return profiles between securitisation and covered bonds.

Many European countries have succeeded in establishing sound regulated covered bond markets. If there is to be a common European regulatory framework, this must build on practises that are both considered as best practise among national regimes, and in compliance with international standards.

A possible future regulatory framework should not disrupt well-functioning markets. As the CMU Action Plan highlights market-driven initiatives and standardisation (like the Green Bond Principles to promote transparency and integrity in the development of the green bond market), the current balance of competences should be left unchanged. Greater convergence should be achieved through voluntary, non-legislative coordination measures. 

The EBAs recommendations could be utilised most advantageously, when it comes to significant and positive effects on the development of a European covered bonds market, as central building blocks for (new) national legislations, as is the case with the new Dutch covered bond legislation. For the time being, we do not support a 29th regime, as there then will be too many options. This in turn would not enhance standardisation, simplicity or transparency.

>> See the ESBG position on Capital Markets Union


Capital Markets; Capital Markets Union; Investments; Regulation