EBF advisor: Simon Pettinger
Publication date: 02 October 2018
The EBF supports the objectives of the European Commission’s proposals to promote further integration of EU financial markets and to advance the Capital Markets Union (CMU) project.
We specifically welcome the consistency of the proposed supervisory regime with a focus on covered bond public supervision and investor protection. Overall, the approach taken is balanced and covers in our view all necessary elements for a sound covered bond product, thus achieving the objective of justifying a preferential treatment in terms of capital requirements. However, the proposal reveals some uncertainties regarding its scope (eligibility of cover assets), the definition and use of hedging derivatives and the composition of cover pools that may hamper the well-functioning and cost-efficient market we have today.
Furthermore, we also welcome the proposed amendments of Article 129 CRR aiming at reinforcing and complementing the requirements for the preferential capital treatment of covered bonds.
Our main concerns on the proposals are as follows:
- Eligible assets: While the cover assets must be of high quality, the proposal only provides formal criteria to determine which assets are eligible for covered bonds. We are concerned that, when scrutinized, these criteria are not robust enough to ensure the high quality of the assets.
- Composition of the cover pool: There is no evidence that the composition of cover pools raises major concerns in capital markets and/or from investors. We therefore question the requirement to provide for a sufficient level of homogeneity of assets in the cover pool as this could lead to much higher systemic risk in these financial markets.
- Use of hedging derivatives: The proposals to set a limit on the derivative contracts in the cover pool could hence imply a limit on hedging capacity, which could contradict the benefit of using derivatives for hedging purposes and would be against the interests of the covered bond investor.
- Liquidity buffer: EBF considers the liquidity buffer requirements excessive, considering elements already in place in other regulation. We believe that the liquidity buffer requirement at the cover pool level would increase the funding costs.