The European Banking Authority launched a consultation on draft implementing technical standards on reporting for asset encumbrance today (Tuesday), incorporating a template for covered bonds – “one of the main drivers of asset encumbrance”, with the aim of harmonising reporting.

The EBA said that the development of reporting templates for asset encumbrance will fulfil tasks mandated by the European Commission, Parliament and Council under CRD IV/CRR, and also a recommendation of the European Systemic Risk Board (ESRB) in February when it published a Report on Bank Funding.

The ESRB noted then that asset encumbrance for a sample of large European institutions had increased substantially between 2007 and 2011, with the median ratio of encumbered assets over total assets rising from 7% to 27% and the average asset encumbrance ratio, weighted by total assets, increasing from 11% to 31%.

The EBA said today that asset encumbrance reporting will provide supervisory authorities with the necessary information on the level of asset encumbrance on institutions.

“Firstly, it will allow a harmonised measure of asset encumbrance across institutions, which will allow supervisory authorities to compare the reliance on secured funding and the degree of structural subordination of unsecured creditors and depositors across institutions,” it said. “Secondly, it will allow supervisors to assess the ability of institutions to handle funding stress, by providing an assessment of the ability of switching to secured funding.

“Thirdly, it can be incorporated into crisis management, as it will allow for an assessment of the assets available in a resolution situation.”

Financial authorities such as Sweden’s FSA and central bank have called for greater transparency from banks about their levels of asset encumbrance, with regulators and other market participants having bemoaned a lack of useful data.

The implementing technical standards (ITS) include a reporting template for covered bond programmes.

“Specific monitoring related to covered bonds is deemed necessary in order to ensure an effective and harmonised supervision of asset encumbrance and cover bond issuance,” said the EBA.

In the EBA’s words, it listed as the main reasons for this:

• Covered bonds programmes constitute one of the main drivers of assets encumbrance.
• Asset encumbrance in covered bonds programmes is mainly a long term encumbrance, as opposed to encumbrance generated by repo financing and securities lending, and mainly involves loans assets.
• Asset encumbrance profiles, due to covered bonds programmes, are particularly heterogeneous, and hence difficult to compare, across institutions and Member States, due to the fact that the extent of overcollateralisation varies not only as a function of varying national regulatory minimum requirements but also as a function of rating agencies requirements and the issuer’s strategies in terms of voluntary collateralisation buffers.

The ITS consist of three parts:

• A legal text which introduces the definition of asset encumbrance and outlines both the frequency and the proportionality criteria in the reporting;
• Reporting templates and instructions which, in the future, will be used for regulatory reporting on asset encumbrance;
• A data point model (DPM) and validation rules providing a structured representation of the requested data. The DPM contains all the relevant technical specifications necessary for developing an IT reporting format.

The EBA said that following the end of the consultation period on 24 June, and to the extent that the final CRR text changes before adoption of the ITS, the EBA will adapt the draft ITS accordingly to reflect any developments.

The EBA consultation can be found here.