The Association of Danish Mortgage Banks has drawn comfort from European Commission CRD IV proposals released yesterday (Wednesday), suggesting that Denmark’s concerns about covered bond treatment might be addressed ahead of Basel III’s implementation, but other market participants have suggested that such optimism could be misplaced. Meanwhile, hopes of MBS being eligible for liquidity buffers remain.

The Danes have argued that the Basel proposals could damage their mortgage system and, together with covered bond associations in Germany and elsewhere, have lobbied for CRD IV to give better treatment to covered bonds.

Commissioner Michel Barnier stressed in his announcement of the proposals that while it was important for the EC to respect the Basel Committee’s framework, it should take into account European “specificities”. The Commission also stressed that the observation period should be used to the fullest possible extent.

Yesterday the Danish association (Realkreditrådet) welcomed the Commission’s paper, saying that it holds out the possibility of their covered bonds being treated on a par with their government bonds.

“The European Commission has taken heed of one of the crucial Danish arguments in favour of the Danish mortgage system,” said Jan Knøsgaard, deputy director general of the association. “The Commission recognises the fact that differences exist between the covered bonds of different countries.

“It is very encouraging that the coming liquidity rules will be expanded with a set of quality criteria.”

A final definition of two tiers of liquid assets will not have to be arrived at until 2015, with the European Banking Authority charged with reporting to the EC by the end of 2013 what assets it believes meet criteria laid down in yesterday’s proposals. (See yesterday’s story for more details.)

However, some market participants played down the chances of any meaningful changes from Basel III.

Florian Hillenbrand, senior credit analyst at UniCredit, said that while there are differences of opinion as to whether or not covered bonds might yet gain better treatment, he does not see that happening – even if he does not believe this is justified.

“From my perspective, I rather see covered bonds being put at a significant disadvantage compared with what we had before,” he said, “because they get worse treatment in comparison to assets that are definitely more risky, less liquid and more volatile.

“Most covered bonds have been more liquid and more stable than Greek or Portuguese government debt, but they are put in a worse position – in particular with regards to the Liquidity Cover Ratio.”

While the EBA has been left to determine which assets qualify as level one and level two assets, the 40% limit on level two assets – where the Basel Committee positioned covered bonds – and 15% minimum haircut they face have been definitively retained in yesterday’s proposal.

UK flies MBS flag

It is not only some covered bond supporters who have taken heart from the form of CRD IV proposed by the Commission; the prospect of some mortgage backed securities being eligible for liquidity buffers had been raised previously and proponents of this position also drew encouragement from the paper.

“The observation and parallel running periods must be fully utilised before long lasting and wide reaching operational issues are settled,” said the British Bankers’ Association. “We support the Commission’s decision to introduce the liquidity coverage ratio as a reporting standard to allow the industry time to work with the Basel Committee and to identify which assets should qualify for the buffer where, in particular, we believe good quality retail mortgage backed securities should stand alongside covered bonds.”