Agreement on the EU covered bonds framework

ABBL Published 08.03.2019

In May last year in this space we had reported about the EU’s project of creating a framework for EU covered bonds. Waiting is now nearly over. Indeed in the late evening hours of 26 February, the European Parliament, the Council and the Commission agreed on a new directive as well as an amendment to the capital requirements regulation (CRR). The big political lines are now known.

Until the last round of negotiations a number of issues were still on the table among which the situation of derivatives in the cover pool, the frequency of investor information, the composition of the cover pool or the segregation of assets there. The article on eligible cover pool assets was also under intense negotiation all through the legislative process until the last minute. A particular place was given to the very specific case of the treatment of public undertakings that ended up being recognized under a number of conditions including an over-collateralization of 10%.

Technical work on the whole deal is still ongoing to finalize the text. As always, the devil is in the detail and for some aspects judgment is still out.

The text will need to be formally approved by the Council at ambassador level and by the European Parliament before being formally adopted.

The directive creating the covered bonds framework provides for 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.

As a reminder the covered bonds package comes in the context of the EU’s Capital Market Union and aims at developing the latter in order to help financing the economy. Covered bonds are already particularly developed in Germany, Denmark, France, Italy, Luxembourg and Sweden. The project hopes to create a covered bonds market also in other Member States of the EU.  Covered bonds are also a typical European product. Indeed 84% of the global volume stem from this part of the world according to EU data and adding up to an impressive 2.1 trillion euros.

By Antoine Kremer, ABBL & ALFI Head of European Affairs

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