An EBA consultation on asset encumbrance reporting launched yesterday (Tuesday) is a positive step, said analysts, although one was still concerned about a focus on covered bonds. Meanwhile, the EU Council today approved what is set to be the final version of CRD IV.

EBA offices, London

The EBA consultation is on draft implementing technical standards on reporting for asset encumbrance. The guidelines will include a template for covered bonds, which the EBA described as “one of the main drivers of asset encumbrance”. (See here for previous coverage.)

Analysts welcomed the initiative, saying that it is a step towards more disclosure on asset encumbrance. According to Frank Will, non-independent desk strategist at RBS, the consultation will help the EBA accomplish the preliminary task of assessing the size of asset encumbrance in Europe.

“European regulators have realised that there is a lack of information on asset encumbrance and the EBA aims at increasing transparency on the various form of asset encumbrance,” he said.

According to Will, a positive element of the consultation paper was that the definition of an asset being encumbered encompassing a variety of assets other than covered bonds, including secured financing transactions, collateral posted for derivative transactions, collateralised financial guarantees, collateral placed at clearing systems, central bank facilities, and underlining assets from securitisation structures.

Jörg Homey, covered bond analyst at DZ Bank, said that the initiative represented a positive development in the debate on asset encumbrance as it could be the first step towards the imposition of harmonised reporting requirements.

However, he noted that the consultation paper still indicated that the EBA perceives covered bonds as the main source of asset encumbrance.

“Collateral posting in the derivative market, collateral in inter-bank lending, and repo operations – I would have thought that the EBA would indicate them as the main sources of asset encumbrance” he added.

Homey said that the reason for the EBA’s assessment may be that covered bond are usually long term funding instruments, therefore contributing to assets being encumbered for a long period of time.

“Derivatives and inter-bank lending are usually short term, so encumbered assets may become free in a shorter period of time,” he said. “This may be why the EBA sees covered bonds as a more important source of asset encumbrance.”

While analysts welcomed the consultation, they also lamented the likelihood that the information obtained by the EBA will not made public, which they said they hoped would be a next step.

Bernd Volk, head of covered bond research at Deutsche Bank, stressed the need for information on all kind of asset encumbrance for each credit institution to be made available for investors and depositors (who are also investors), as it would help them in assessing the risks they are exposed to.

Another point raised was that in its assessment of asset encumbrance the EBA may be focusing too much on legislative requirements rather than banks’ practices, especially for covered bonds.

“The EBA mainly takes into account legislative arrangements and regulations regarding traditional asset classes such as mortgages,” said Homey. “However, as we have seen in recent transactions, such as Commerzbank’s SME covered bond issue, banks are now being more innovative regarding which assets to use in cover pool, and this may affect encumbrance so the EBA should be looking at this as well.”

Analysts said that it is unlikely that the consultation would lead to the imposition of limits on covered bond issuance in the near future.

Meanwhile, the Council of the European Union announced that its Permanent Representatives Committee this (Wednesday) morning approved a compromise text on the CRD IV package following agreement with its European Parliament counterparts, which was reached last week.

The text released by the Council matches a draft seen by The Covered Bond Report last month (see article here) in respect of covered bond treatment. The text now needs to be approved by the European Parliament.

The announcement, including links to the related documents, can be found here.