The European Commission intends to explore the extent to which greater harmonisation of covered bonds could help stimulate the market, thereby contributing to boosting long term financing of the real economy, according to a draft green paper seen by The Covered Bond Report.

European Commissioner Michel Barnier

The green paper – which an EC spokesperson told The CBR is intended to be published in the spring – will mark the launch of an EC initiative to explore ways in which long term finance can be boosted to spur growth of the European economy, a project that ranks high on the agenda of the Internal Markets & Services directorate general, headed by Commissioner Michel Barnier, and is linked to other initiatives such as the EU 2020 objectives and the European Council Compact for Growth and Jobs. The Commission would consider appropriate follow-up actions on the basis of the outcome of the consultation. The thrust of the draft green paper was reported by European affairs news website Europolitics.

In a draft copy of the green paper seen by The CBR, covered bonds are discussed in the context of “ensuring an efficient, diversified and growing supply of long term finance”, one of three main areas in which action is needed in the Commission’s view. The draft paper explores the influence of prudential rules, financial markets and infrastructures, and taxation on the flow of long term finance, and notes that efforts may be needed to develop corporate bond markets as an alternative to bank lending, and that efforts may be needed to stimulate specific financial instrument such as securitisation tools and covered bonds.

The draft green paper says that covered bond markets have proved resilient during the financial crisis but are fragmented along national lines within the European Union, with significant differences in covered bond regimes between Member States.

“These differences mean investors need to analyse each country and each covered bond structure separately, imposing additional transaction costs and reducing investor confidence,” says the draft green paper. “Further analysis is required to explore whether and to what extent greater harmonisation, at least with respect to transparency and disclosure, could spur covered bonds as a long term financing vehicle for the real economy, while taking due account of the concerns that the disproportionate use of covered bonds can raise in terms of increased asset encumbrance of banks’ balance sheets”.

With this in mind the paper therefore proposes to seek views on the pros and cons of developing a more harmonised framework for covered bonds and what elements such a framework could comprise.