A member of the Basel Committee on Banking Supervision has said that the European Commission should stick to the limits placed on covered bonds in the Basel III framework when implementing it through CRD IV. But he said that they could play a greater role in countries lacking Level 1 and 2 assets.

Speaking at a European Covered Bond Council plenary meeting in Stockholm on Thursday, Lars Frisell, chief economist at the Swedish Financial Supervisory Authority and member of the Basel Committee, said that the Basel III framework represented a “global compromise”, and that “it was an achievement to get an explicit role for covered bonds at all”.

Under the Basel Committee’s framework, covered bonds can be included in Liquidity Coverage Ratios as Level 2 assets, meaning that they can constitute up to 40% of LCRs and face haircuts of at least 15%. The ECBC and others have been campaigning for improved treatment of covered bonds in LCRs, with a Danish-German initiative calling for certain covered bonds to be treated as Level 1 assets, on a par with sovereign bonds, which do not face the same limits and haircuts.

“It is important that the Commission stands by this agreement,” he said, adding of the 40% limit that the EU would “have to live with that” and “same thing with the haircut”.

Frisell said that there had been “candid” discussions within the Basel Committee about covered bonds, where it had been noted that covered bonds, too, had suffered during the crisis, and that it was at times difficult for non-European members to see why covered bonds might deserve special treatment given that “it’s hard for them to see differences between RMBS and covered bonds in their own country”.

Such concerns are one reason why the European Covered Bond Council, encouraged by the European Central Bank, has been working towards a “label” for covered bonds. But, asked if a label might help win better treatment for covered bonds, Frisell said that “it could have, if it had already been there”.

However, Frisell said that there remained plenty of time for carving out a role for covered bonds before the final implementation of Basel III for those countries facing a shortage of Level 1 and 2 assets. He said that Denmark and Sweden were “pretty close” to qualifying for special treatment on this basis, adding that it would be “absurd” to punish countries that had kept government debt low.

“My main advice is not to worry too much,” was his advice to Danish concerns about the impact of Basel III.

Frisell pointed to the way in which Australia is planning to cope with such a situation as a model. The Reserve Bank of Australia will have a new committed secured liquidity facility that banks can use to meet the LCR, and this could be secured on covered bonds.