The European Central Bank appears to have relaxed its views on the inclusion of self-originated residential mortgage backed securities in cover pools, according to an opinion on EU legislative proposals.

In August 2010 the ECB criticised the conditions of a proposed waiver in the Capital Requirements Directive allowing the senior tranches of self-originated residential and commercial mortgage backed securities to be used as collateral for covered bonds.

But in an opinion dated 25 January, but posted on the ECB website last Wednesday (see here), the central bank adds caveats to its position.

It refers to its August 2010 opinion as setting out its view that the aim for regulators in the near future should be to remove a waiver on a 10% limit on the inclusion of the senior tranches of self-originated securitisations in cover pools, but goes on to say that their aim should be “to develop a rigorous set of criteria for assets to be included in the cover pool of covered bonds which: (a) do not rely on external ratings; (b) are strong enough to secure market confidence in covered bonds, while allowing financial institutions sufficient time to adjust their respective business model; (c) allow only securitisation within a group; (d) require from the supervisory authorities a ‘look-through’ approach for the assets underlying the securitisation.”

Although the EBC suggests that the above is in line with its August 2010 opinion, it appears to have expanded on the latter by adding points (c) and (d), indicating a revised stance.

“This new opinion points into a different direction,” RBS analysts Frank Will and Jan King told The Covered Bond Report. “In the past, they were quite keen to remove the 10% waiver, but now it seems as if they would allow intra-group securitisation and would allow a look-through approach by the supervisors.”

The ECB’s August 2010 opinion, which can be found here, came in reaction to the European Parliament earlier that year passing a proposed amendment to CRD III that deals with the use of MBS in cover pools, reducing the standard limit on their use from 20% to 10%.

A waiver from this limit for triple-A tranches of MBS was at the time extended to the end of 2013 in a modified way that allows unrestricted use of MBS as long as they are self-originated, with a rating requirement dropped. A review of the appropriateness of the measures by the European Commission was required under the amendment by the end of 2012.

In its August 2010 opinion the ECB said that the lack of a credit rating requirement with regard to self-originated MBS in the amendment could lead to Eurosystem counterparties gaming its collateral framework, and that it has concerns about how the move could affect the standing of the asset class.

RBS’s Will and King noted that concerns raised by the ECB about the requirements governing application of the waiver in its August 2010 opinion are not raised in the central bank’s recent statement, although it maintained its view that intra-group securitisation have a minimum credit rating of Step 1 to be eligible as covered bond collateral, with external securitisation explicitly excluded.