The Danish Presidency of the Council of the EU is targeting mid-March for agreement on a compromise proposal on CRD IV, with an interim version of the text expected soon and the European Central Bank and European Parliament having opined on the project.

The ECB’s opinion is the most recent of these developments, having been made public on 25 January. The central bank said that it received a request from the Council of the EU for an opinion on a legislative package proposed by the European Commission (EC) on 20 July to strengthen regulation of the banking sector. The package concerns a proposal for a directive and a regulation, which together replace the prevailing Capital Requirement Directives.

In its opinion the ECB noted that the commission’s proposals represent “an important step towards strengthening regulation of the banking and investment firms sector and creating a sounder and safer financial system in the Union” and said that it strongly supports the timely and effective implementation of the Basel capital and liquidity standards.

The ECB also made specific observations on a range of aspects of the legislative package, such as macro-prudential supervision and the scope for Member States to set stricter rules, eligibility criteria for regulatory own funds, and capital buffers.

With respect to the liquidity framework in CRD IV, the ECB said that it welcomes the commission’s unequivocal commitment to introduce into EU legislation a liquidity coverage requirement (LCR) and a net stable funding ratio (NFSR), in line with Basel III agreements. The central bank made four points in relation to the proposed liquidity framework, including that it recommends being consulted by the European Banking Authority (EBA) when it is developing a uniform definition of high quality assets as well as on being consulted on the assessment by the end of 2015 on how to ensure that institutions use stable sources of funding.

It also touched on the question of how authorities should react in case a financial institution breaches the LCR, and said that the EBA, in cooperation with the European Systemic Risk Board (ESRB), should be involved in formulating guidance on the possible release and subsequent build-up of the liquidity buffer in times of stress.

The Danish Presidency published its Compromise Proposal for CRD IV on 9 January.

Katalin Dobranszky-Bartus, senior economic adviser at the European Mortgage Federation, said that the proposal was published to stimulate discussions between the members of the Council on key political priorities, with liquidity being one of the major issues.

Danish PM Helle Thorning-Schmidt and EC President José Manuel Barroso at start of Denmark's Presidency

“In this Proposal, besides some technical changes, the liquidity issue is unmistakably understood as a political decision,” she said. “The Danish Presidency is aiming at reaching a compromise concerning the CRD IV Proposal by mid-March 2012.”

The compromise text introduces a range of amendments, including for example in a section on “own funds requirements for exposures in the form of covered bonds” (article 478). There, the compromise proposal sets out certain aspects that the EC, in consultation with the EBA, should take into account when considering the appropriateness of risk weightings and own funds requirements. The text says that a report from the EC to the European Parliament and the European Council on this topic should have regard to factors such as “the transparency of the covered bond market and the extent to which this facilities comprehensive internal analysis by investors in respect of the credit risk of covered bonds and the collateral against which they are secured”.

According to the compromise text the commission’s report should also take into account “the extent to which covered bond issuance by a credit institution impacts on the credit risk to which other creditors of the issuing institution are exposed”.

The Covered Bond Report understands that the January compromise proposal is only a first such text, with other versions to follow. A second compromise text is expected soon.

The topics of transparency and asset encumbrance to which the Presidency’s text refers, or at least appears to with respect to asset encumbrance, are themes that have been preoccupying market participants for some time, as reflected by a labelling initiative of the European Covered Bond Council (ECBC) and a transparency initiative launched by the Covered Bond Investor Council (CBIC).

In December the Rapporteur of CRD IV in the European Parliament, MEP Othmar Karas, published a draft report on the commission’s July 2011 proposal. A market participant said that the position adopted in the report is fairly close to the commission’s and that technical aspects of CRD IV were not addressed in much depth.

Dobranszky-Bartus said that Karas’s report “flagged several twists” in the Basel III rules, such as the end of the zero risk regime of sovereign risk exposures or the delays in implementation of the Basel rules. She said that Karas is committed to the principle of maximum harmonisation and therefore signalled a soft approach to some of the elements of the liquidity provisions and the leverage ratio.

In his report Karas said that” sufficient and high quality liquidity standards are probably the most important part of the crisis response” to avoid “a future drying out of the markets”

He said that the Commission has proposed a thorough investigation before finally setting the ratios, and that he called on “all stakeholders to co-operate with the EBA as well as the Commission in providing them with the necessary data so that essential elements such as the eligibility of assets and run-off rates can be assessed”.

Dobranszky-Bartus said that the parliamentary Economic & Monetary Affairs Committee intends to continue discussions of the draft Karas report with the aim of presenting the final report to the European Parliament plenary for adoption by June-July 2012.

“These ambitious timetables of the European lawmakers promise intense activity on this file in the coming months,” she said.