- Market participants’ support for an
EU-wide covered bonds framework, to sit alongside national
regimes, has grown in the past 12 months;
- It coincides with EU authorities’
scrutiny of the asset class’s regulatory
treatment, including its treatment under the liquidity
- There are concerns that even partial
harmonisation could dilute the product and supervisory
standards in the leading German and Danish markets, and harm
competition and diversification;
- Given the slew of more urgent financial reforms
on the Brussels agenda, any new framework could be a few
Industry support for an EU-wide covered bonds framework has
grown over the past 12 months, with investors and issuers
agreeing that harmonisation would help safeguard the asset
class’s preferential regulatory treatment.
But the instrument’s reliance on national
mortgage and insolvency laws, plus fears over diluting the
purity of Germany’s pfandbrief market,
mean any new regime would sit alongside – rather than
replace – national rules.
The topic coincides with EU authorities’
scrutiny of the asset class; namely, the European Banking
Authority’s (EBA) study regarding the
instrument’s ranking under the liquidity coverage
ratio (LCR), and the European Commission’s
fragmentation concerns in its latest funding consultation
"To many, the EBA survey and
European Commission green paper for long-term financing
clearly put harmonisation of covered bonds on
Brussels’s political agenda," said Louis Hagen of
Münchener Hypothekenbank, speaking at the Association for
Financial Markets in Europe’s covered bonds
conference in Berlin on Friday.
speculation that the EBA will advise against the asset class
being counted as level 1 in the LCR has renewed interest in
the long-running harmonisation debate.
The European Commission’s ability to change
regulatory privileges and force the industry to share high
quality standards has forced many in the industry to reconsider
their views on harmonisation.
"I must say that a couple of years ago I could not imagine
what I am saying now, but from our perspective, to safeguard
continued preferential regulatory treatment, a partial
harmonisation of the covered bonds frameworks would seem
beneficial," Hagen said.
Benefits of a single framework
As one of the few areas of finance to not be harmonised
across the EU, the industry and regulators agree there are
clear benefits to a single framework.
A more integrated market would be larger, more liquid, and
improve ease of access for issuers. It would also create more
issuances in the region’s less advanced markets,
potentially helping financing in those countries.
EBA policy advisor Christian Moor also stressed the
importance of a level playing field and transparency, so that
bondholders don’t have to look to national laws to
determine their recovery in the event of a bank’s
Buyside panellists also saw the potential benefits. "We of
course have some interest in harmonisation since, as you can
imagine, it is a fairly complex [task] to analyse all the
different regulatory regimes in Europe," said Tim Ockenga, head
of investments at the German Insurance Association.
This would be particularly helpful in today’s
low interest rate environment, which has prompted German
investors to increasingly invest in French and Scandinavian
Ockenga added that greater consistency could greatly benefit
small and medium-sized insurers, as they would need to devote
less time and resources to comparing different markets.
Jens Tolckmitt, chief executive of the Association of German
Pfandbrief Banks (or Vdp) which co-hosted the event, said
he was pretty convinced that there is potential for
"But this is limited by the fact that a lot of the
legislation underlying covered bonds in different countries is
classic national laws," he added.
For example, the asset class is inextricably tied to
including insolvency and mortgage laws, which fall within the
remit of member states’ jurisdiction.
Panellists throughout the day agreed that, as a result of
this, full harmonisation is unlikely.
"We should probably move in the direction of having a
European model that sits next to the national model, with
certain components being harmonised to reap some of the
benefits of integration, liquidity and market access," said
keynote Philipp Hartmann, head of the European Central Bank
(ECB) directorate general’s financial research
division, speaking in his own capacity.
One-size-fits-all is not the right way to approach mortgage
markets, he said, and so some national rules regarding market
particularities and conditions must remain.
The question then, is which aspects of the market can be
harmonised. According to Hagen, this is achievable in areas
such as asset quality, transparency, a dedicated supervisory
framework, and asset segregation.
Other panelists suggested that over-collateralisation could
be another area to address.
There are concerns that an EU regime could threaten the
purity of the Danish covered bond and German
pfandbrief markets, which created the asset class over
200 years ago.
"We are very pleased with the current pfandbrief
regime," said Ockenger. "We think the quality is excellent, the
transparency is strong, and so to that end we would not welcome
harmonisation that would lead to a dilution of the high
standards we have achieved in Germany."
Tolckmitt noted that for 20 years, Vdp had been thinking of
ways to make the asset class more important at a European
level, but that harmonisation was always decided against
because the significant risk of dilution.
"If we welcome it, then it must be on the basis of high
quality," he said. "This doesn’t mean German
quality, but we have a certain view of what that means
regarding special supervision and the good experience [we have
had] in Germany."
Indeed, compromising the role played by today’s
pfandbrief supervisors is a major concern.
"We like BaFin and Budesbank and how they treat the
product," said Tolckmitt. "We are in good hands with the German
regulators with regard to the product and they know the
specifics of the law."
The question, he said, is how that would level out between a
national and European level, if European supervision is
Such supervisory questions are already being asked with
regards to the single supervisory mechanism and bank recovery
and resolution directive under the incoming European Banking
An EU framework could also harm the product’s
diversification and future development.
"A risk is that if you overshoot in harmonising, you may
remove a source of competition which leads to innovation," said
the ECB’s Hartmann.
Nordea Investment Management’s Henrik Stille
said this might be the case, but that the limited harmonisation
being discussed would ensure there would be still be plenty of
opportunities to find underpriced opportunities in the
Hagen said there would still be room for competition and
individual products. But he placed the onus of instrument
quality and competition on investors.
"If they give credit to high quality, then it pays to
produce high quality," he said. "If that is not the case, then
we will end up at minimum levels and products will not be
different anymore…it is very much up to the investors to
pay for high quality that they get."
In any event, given the number of more urgent financial
reforms being considered by EU authorities, any pan-European
covered bonds regime could be a few years away.
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