By Waleed El-Amir, Head of Group Finance, UniCredit &
On the 5th of January 2016, the ECBC – as the voice of the European covered bond industry – formally responded to the European Commission’s Consultation Document on Covered Bonds in the European Union (EU) (available here), which was published on the 30th of September 2015 as part of the Commission’s Capital Markets Union (CMU) initiative.
In launching this exercise, the Commission recognised that, “European credit institutions are world leaders in covered bond issuance”. However, in parallel it stated its view of the market as currently being fragmented along national lines, which it believes, “constrains standardisation in underwriting and disclosure practices, and creates obstacles to deep, liquid and accessible markets, in particular across borders.” In this context, the Commission’s Consultation Document proposed a pan-European framework for covered bonds which would build on national regimes that work well without disrupting them and it would be based on high-quality standards and best market practices.
In responding to the Consultation, the ECBC welcomed the European Commission’s proposal for further convergence in European covered bond markets and thanked the Commission for the invitation to submit comments on the Consultation Document, which, in the Industry’s view, constitutes one of the most important legislative consultations on covered bonds in decades. To ensure a comprehensive, wide ranging and detailed response to the Consultation Document, the ECBC collected feedback from more than 750 national covered bond experts.
As an initial comment, the ECBC welcomed the European Commission’s cautious approach towards harmonising covered bond frameworks in the EU. The subjects addressed in the Consultation Document are of crucial importance to the very different legislative frameworks that exist in Europe, which are a consequence of historical national differences in terms of mortgage markets, housing policies, consumer behaviour, insolvency law, credit and valuation regulation etc. Consequently, the ECBC believes that the concept of full EU covered bond harmonisation is a utopia.
However, the ECBC does see room for improvement and further convergence in specific areas in order to safeguard the recognised quality of EU covered bonds, which justifies their preferential regulatory treatment. Further convergence in covered bond frameworks would also enhance transparency, support the rationale of preferential risk weighting and make it easier for investors to take more informed investment decisions.
In the view of the ECBC, a balance must be struck between maintaining national covered bond legislative frameworks and establishing a common European framework, by means of (i) a recommendation to encourage Member States to increase convergence and (ii) a high quality principle-based directive ensuring harmonisation of certain minimum
A combination of a recommendation and a principle-based directive will ensure that national markets continue to function whilst safeguarding the prominent role of covered bonds as a crisis management tool able to promote: (i) investors’ confidence; (ii) financial stability; and (iii) long-term financing. In addition, this will maintain competition amongst Member States’ covered bond markets, thereby ensuring that EU covered bond markets remain attractive to investors, whose investment decisions are currently mainly driven by risk appetite and search for yield.
The ECBC agrees that certain country-specific issues must be taken into account by the European Commission when evaluating the responses to the Consultation Document. Given the structural differences that exist between national covered bond market structures (see above), the many subjects addressed in the Consultation Document are of vital importance to the very different covered bond legislative frameworks within the EU and, consequently, Member States will react individually and according to their national interest.
The ECBC encourages the European Commission to review these national country-specific issues in order to ensure that currently well-functioning national covered bond markets continue to do so in the coming years, and, thereby, avoid disrupting EU covered bond markets more than the Commission deems absolutely necessary.
Finally, the ECBC would like to emphasise the importance of drafting a legislative proposal which incorporates these country-specific points and is sufficiently principles-based so as to provide flexibility for the different national covered bond structures across the EU.
EUROPEAN COMMISSION’S COVERED BOND CONFERENCE
The deadline for the submission of responses to the European Commission’s Consultation was the 6th of January 2016 and since this date officials within the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) have been assessing the comments received. The Industry will have a first opportunity to hear DG FISMA’s views in this regard in Brussels on the 1st of February 2016 at the European Commission’s Conference on Covered Bonds. The Conference will be opened by DG FISMA Commissioner Jonathan Hill with the remainder of the event being broken down into sessions reflecting the structure of the Commission’s Consultation paper as follow:
- Session 1: Covered Bonds Markets – Analysis
of Market Trends
- Session 2: A more integrated Covered Bond
Framework? The investor’s perspective
- Session 3: A more integrated Covered Bond
Framework? Assessing the options
- Session 4: Technical-Legal Panel: Elements
for an integrated Covered Bond Framework
The Industry will be well represented during the Conference and it looks forward to this opportunity to elaborate upon the ECBC position regarding the Commission’s initiative on covered bonds.
The full ECBC Response to the European Commission’s Consultation on Covered Bonds in the EU can be accessed here and further details concerning the Commission’s 1st of February 2016 Conference can be found here.
This article was originally published in the EMF-ECBC Market Insights & Updates newsletter in January 2016.