The ICMA Covered Bond Investor Council has backed European Parliament amendments to European Commission bail-in proposals because it believes the changes would clarify and protect the position of covered bonds.

Justus Lipsius building, Brussels: headquarters of the Council of the European Union, where the European Council meet

The EC’s proposal for a directive establishing a framework for the recovery and resolution of credit institutions and investment firms (the so-called bail-in framework) offers the potential for the exemption of covered bonds from key bail-in proposals, but market participants have said that its language does not go far enough because it only says that Member States “may” exempt covered bonds from certain provisions.

A report by the Economic & Monetary Affairs Committee (ECON) of the European Parliament of 11 October proposed changing this (in amendment 95) to say that “Member States shall exempt from this provision covered bonds as defined in Article 22(4) of Council Directive 86/611/EEC”. (See here for previous coverage.)

“CBIC members believe that amendment 95 is also a positive addition to the text to ensure pan-European certainty to investors,” said the investor body in a briefing document seen by The Covered Bond Report. “CBIC members noted some positive market developments notably in Germany in the last couple of months. In the current German legislation on bank resolution, the instrument of Pfandbriefe (German style covered bonds) is explicitly exempt from any bail-in measures in the course of a bank resolution.”

A covered bond analyst said that Germany’s Credit Institution Reorganisation Act can only do this if EU regulations either fully exempts covered bonds from bail-in or allow national laws to exempt them. He also said that while he expects national authorities to be able to do this, he understands that the UK might not be willing to fully exempt covered bonds from bail-ins.

The CBIC also called for a more explicit protection of covered bonds’ status in the bail-in framework by backing another ECON amendment (93) that would expand a clause that exempts “secured liabilities” from being subject to resolution authorities’ write-down and conversion powers to read: “secured liabilities, such as covered bonds in a covered pool or register.”

The investor body argues that clarification is needed, particularly given the benefits to Europe of having a private well-functioning mortgage market that has fared well during the crisis and after.

“CBIC members understand that the final crisis management resolution regime will be compliant with the current wording regarding covered bonds in the CRD and UCITS – and the fact that a covered bond should be sufficiently covered at all times – including in times of stress,” it said. “Indeed sufficient assets to fully and timely repay covered bonds is a defining feature of covered bonds that deserve the utmost attention of the European Council in its deliberation, as any opacity here will put considerable pressure on this key capital market instrument – that has been one of the few bank’s funding sources which has remained available in decent volume throughout the crisis.”

The bail-in proposals are due to be discussed by the European Council, the Commission and Parliament.

Photo: Council of the European Union