01 July 2014
The European Banking Authority (EBA) published today an opinion on the preferential capital treatment of covered bonds and a detailed report on the European covered bonds frameworks. While expressing support for the current approach laid down in the Capital Requirements Regulation (CRR), the EBA recommends additional criteria to qualify for preferential treatment. The opinion also calls for further clarifications on current disclosure requirements and provides advice on the preferential treatment of some specific cover assets. Finally, based on the analysis presented in the report, the EBA has identified a series of best practices ensuring a robust and consistent regulatory framework for covered bonds.
The EBA is of the opinion that the preferential risk-weight treatment that certain covered bonds receive across the EU in accordance with the CRR is appropriate, but it advises to strengthen the framework by introducing further qualifying criteria for their preferential treatment.
In particular, the Authority recommends that the additional qualifying conditions should cover minimum regulatory over-collateralisation, liquidity risk mitigation, and special public supervision. In addition, it advises that the disclosure requirements for preferential capital treatment currently foreseen in the CRR should be further clarified through the development of binding technical standards.
Finally, the EBA has concluded that residential guaranteed loans should be maintained within the scope of the preferential risk-weight treatment. However, it recommends not to include aircraft liens in the scope and not to renew the derogation on the use of residential mortgage-backed securities (RMBSs) and commercial mortgage-backed securities (CMBSs) as cover assets beyond December 2017.
The findings of the report are based on a review of national regulatory frameworks and supervisory practices on covered bonds in the EU, which identified substantial differences across the single market, as well as several areas where a common approach to covered bonds should be achieved. The review also evaluated main industry initiatives related to covered bond disclosure to investors.
Through this review, requested by the European Systemic Risk Board, the EBA also identified best practices for a robust common regulatory framework for covered bonds across the EU. They cover crucial areas of covered bond regulation, from the dual recourse principle, segregation of cover assets and bankruptcy remoteness, composition of cover pools, loan-to-value (LTV) limits and measurement, over-collateralisation, liquidity buffers, stress testing, supervision and disclosure.
The EBA has developed this opinion following a call for advice from the European Commission based on Article 503 of the CRR, which required the EBA to provide advice on the adequacy of the current prudential treatment of covered bonds. The task of identifying best practices in relation to covered bonds follows from a recommendation by the European Systemic Risk Board (ESRB) on the funding of credit institutions (ESRB 2012/2).