A second compromise text on changes to Capital Requirements Directive proposes that the European Banking Authority (EBA) take into account a broader range of assets, including RMBS, in a review identifying what should count towards liquidity buffers.

Denmark's crown prince couple and Herman Van Rompuy in Brussels

Proposed by the Danish Presidency of the Council of the European Union, the latest draft identifies “RMBS of high liquid and credit quality”, equities and gold as assets that the EBA should include in a review of the liquidity of a range of assets to determine their suitability for liquidity buffers.

According to the Presidency, widening the reporting of the range of assets to be considered highly liquid is an “important adjustment” compared with its first compromise proposal.

Under Basel Committee on Banking Supervision proposals, covered bonds are eligible for Liquidity Coverage Ratios (LCRs) as level two assets, which will be limited to up to 40% of these liquidity buffers and face a haircut of at least 15%. CRD IV proposals released by the European Commission in July gave the EBA a mandate to assess the liquidity of certain assets with a view to this ultimately determining the eligibility criteria for two tiers of liquidity buffers.

The Covered Bond Report understands that the Presidency’s first compromise proposal removed reference to caps on the contribution to total liquidity buffers of level one and level two assets, and that this has been maintained in the latest compromise text. However, the second text is said to leave open the possibility of caps being reintroduced, with Article 481 1.(d) stating that the EBA shall in its report on liquidity requirements assess the appropriateness of “providing mechanisms restricting the coverage of liquidity requirements by certain categories of liquid assets”.

In a new recital on liquidity in its latest compromise proposal, the Presidency appears to address the challenge of balancing on the one hand alignment with Basel III and on the other hand features of European markets, noting that legislation to introduce a LCR should be equivalent to that set out under the Basel III framework, “taking into account […] European specificities”.

The latest compromise text also provides, according to the Presidency, for Member States to have “full flexibility in setting national requirements in relation to liquidity (until 2015) and the leverage ratio (until 2018)”.

Released at the end of February, the second compromise proposal takes into account discussions of a Council working group during January and February and represents a “second ‘package of flexibility’”, according to the Presidency. (See here for previous coverage of an initial compromise text.)

“In the first compromise text the Presidency tried to strike a balance between the need for national flexibility while retaining the ambition of creating a single rulebook for the EU,” it said. “Following discussions in the Council Working Group it has become clear that further flexibility is needed.

“The Presidency believes that this second “package of flexibility” strikes an appropriate balances between differing views in the Council and that adhering to the thrust of this package, with possible minor adjustments, will constitute a viable approach for reaching a compromise in Council as soon as possible.”