The Economic & Monetary Affairs Committee (ECON) of the European Parliament has put forward proposals for a bank resolution framework under which voluntary overcollateralisation of covered bonds would be explicitly protected, in contrast to a European Commission proposal that makes this an option.

A legislative proposal for a bank recovery and resolution framework put forward by the European Commission (EC) in June was widely seen as positive for covered bonds because it excluded secured liabilities from bail-ins and singled out covered bonds as an asset class that member states could exempt from resolution authorities’ rights to bail-in any excess collateral.

However, the exemption is only a choice under the commission’s proposal, even though market participants said that member states would be unlikely not to take advantage of the option introduced with respect to covered bonds on the latter point, in particular in jurisdictions with long established and large covered bond markets.

A draft report from ECON from last Thursday (11 October), however, clarifies the treatment of voluntary OC in favour of covered bonds.

Florian Eichert, senior covered bond analyst at Crédit Agricole, said that ECON’s draft report in the relevant section of the directive text changed “one very small, but extremely decisive” word.

“They have replaced the word MAY with SHALL,” he said. “So essentially the choice to not touch voluntary OC is not a choice anymore in these proposals but a binding requirement.”

The decision is justified by ECON by a need to “keep covered bonds workable also after the implementation of the directive”.

“[I]t must include a provision ensuring that the whole package of a covered bond arrangement remains intact during the resolution process and until the covered bonds mature in accordance with the relevant covered bonds legislation,” said ECON. “This means that all assets, including over collateralization, the covered bonds and all derivatives should stay together throughout the process.”

ECON’s report will form the basis of negotiations with the European Council and the EC as part of the legislative process, with a final text on a bank resolution directive is still some way off.