Covered bonds are used to financing the economy and in particular mortgages, infrastructure projects or public debt. The regimes vary from one EU Member State to the other. From 2015 onwards the European Commission has been steadily working on a potential common covered bond regime in the context of its Capital Markets Action plan launched by then Commissioner Jonathan Hill.
Last year the European Parliament took the opportunity to make its views heard via the own initiative report steered through the House by the German rapporteur Bernd Lucke. A notable feature of that report is that it allows for covered bonds based on the UCITS definition – as this is traditionally the case in Luxembourg – to continue being labeled as such.
In March 2018 Hill’s successor Vice-President Valdis Dombrovskis finalizes the work of the Commission administration and the institution comes forward with two legislative proposals: a directive that ambitions to create a European covered bond framework and a regulation that modifies article 129 of the CRR. The directive provides a common definition, defines the structural features of the instrument, defines the tasks and responsibilities for the supervision of covered bonds and sets out the rules allowing the use of the “European Covered Bonds” label. The regulation amending the CRR adds further requirements for granting preferential capital treatment. UCITS based covered bonds are to come to an end according to the proposal. Nevertheless there is some potential when it comes to the eligible assets in the directive.
The legislative proposals are now to make their way through the European Parliament and the Council. Both will as of May start their work on the texts and will consequently amend them. The issues are not considered as too controversial paling next to the likes of the RRM, EDIS, EMIR or the ESAs review. An overall agreement and a consequent adoption are expected before Spring next year when the European Parliament shuts down in view of the 2019 elections.
By Antoine Kremer, ABBL & ALFI Head of European Affairs