The director of the financial markets directorate of the European Commission’s DG Internal Market and Services has welcomed the European Covered Bond Council’s labelling initiative and said that it could foster a “virtuous circle”.

European Commission, Brussels

Emil Paulis, director of Directorate G – Financial Markets, made the comments in a letter on Tuesday of last week (26 February) replying to Annik Lambert, secretary general of the European Mortgage Federation (EMF), which is the ECBC’s parent. She had written to European Commissioner for Internal Market and Services Michel Barnier about the project.

Paulis said that the Label initiative will help improve access to information on covered bonds, making it transparent to investors, regulators and market participants. He said that the availability of sufficient and relevant information about cover pool assets is “crucial” with regard to various issues.

“First, the disclosure on the quality of the underlying assets will help to maintain the consideration of covered bonds as a high quality and low risk instrument,” he said. “It could also enable a better comparison between different issuances of covered bonds for the benefit of investors.

“Second, the enhancement of transparency will allow entering in a virtuous circle, as it will help the development of secondary markets for these financial instruments and it will foster further standardisation of these products. Actually, liquidity on secondary markets and standardisation are crucial in order to attract institutional investors in the context of stimulating long term financing and investment in the real economy.”

He added that the initiative appears to be consistent with measures related to the Regulation on Credit Rating Agencies (CRA III) aimed at reducing overreliance on external credit ratings by allowing financial institutions to strengthen their own credit risk assessment.

The EMF’s Lambert had written to Commissioner Barnier about the launch of the label and its mission.

“As you may be aware, the commitment to enhance transparency in the covered bond market through the establishment of the Covered Bond Label is not limited to the issuer community,” said Lambert. “An intense and constructive dialogue was also held with the investor community; major national and European authorities; as well as with the main law firms active in the covered bond arena who have supported and followed the creation of the Covered Bond Label Foundation and its website.”

Proponents of covered bonds have suggested that the Label could play a role in regulations such as CRD IV if European authorities are seeking a way of establishing a quality “perimeter” for the asset class.