The CBR understands that the ECBC will soon take a final decision on adopting CRD compliance as a criterion for the Label, shortly after the issue proved contentious at a meeting last week, when the industry body’s future leadership was also contested for the first time.

ECBC offices, Brussels

A switch to CRD compliance as an eligibility criterion for the Label could result in some covered bonds losing their Labels just a year after the initiative was launched, but is seen by proponents as a move that would address concerns from regulators that the European Covered Bond Council initiative, although welcome, has not gone far enough.

A move from UCITS to CRD was last week described as “logical” by Ulrich Bindseil, director general, market operations, at the European Central Bank — one of the institutions that the ECBC is trying to win over with the Label. The ECB in November 2012 itself moved to CRD compliance in the eligibility requirements for own-use covered bonds in its collateral framework.

The possibility of changing the Label eligibility criteria was discussed at an ECBC meeting in Barcelona on Tuesday of last week (10 September) but, although a majority of representatives indicated that they were in favour of CRD, it was decided to allow more time before a firm decision is made.

However, The CBR understands that the ECBC is now preparing the groundwork for a binding decision on such a move to be taken in the coming weeks.

Unease about the change is understood to have been expressed by some representatives of jurisdictions with covered bonds that are not CRD compliant, with support from others that are not directly affected.

Among those countries with issuance that is not CRD compliant are Luxembourg and Denmark. The only Luxembourg issuer to have a Label is Société Générale Lettres de Gage (SG LDG), whereas seven Danish issuers have signed up. Denmark’s Nykredit Realkredit has two types of Danish covered bonds Labelled, SDOs and ROs, and the latter are not CRD compliant, as are covered bonds issued by Danish Ship Finance (Danmarks Skibskredit). These Danish covered bonds and those of SG LDG have been cited as those currently Labelled programmes at risk of losing eligibility.

A funding official at a Luxembourg bank that has not signed up to the Label said that the jurisdiction is against CRD having a role in the Label.

“For the time being, as long as the ECB or EC is not giving relief – in capital terms for example – the Label is not really useful,” he said, arguing that there is therefore no advantage in making a burdensome move to CRD compliance.

“There would be if this situation is going to turn around,” he added, “but for me there are no direct signs of that, so we should leave it where it is. It is only political pressure and when Bindseil or whoever says that they are speaking in a personal capacity, they are doing just that, because I know that at the ECB and elsewhere they have the same discussions and disagreements that there are at the ECBC.”

Others argue that while the CRD definition of covered bonds as it stands may not be a problem, it could change at some point in a way that would render some Labelled covered bonds ineligible, and that the industry would in effect be ceding control of the criterion.

“You have to remember that the EBA [European Banking Authority] is currently assessing covered bond structures for their worthiness when it comes to preferential treatment and there is no saying at this point what they might come up with and who might be impacted,” said an analyst.

Such an outcome could be comparable to when the ECB changed the eligibility criteria for its collateral framework and some French issuers, for example, were affected. Conversely, while France’s obligations à l’habitat have hitherto not been CRD compliant, they are set to be under CRD IV.

Jens Tolckmitt, chief executive of the Association of German Pfandbrief Banks (vdp) and the German representative on the ECBC steering committee, said that while Germany is happy to make the move, it is important that regulatory developments and their impact are taken into account.

“We have always been in favour of CRD and we are still in favour of it today,” he said. “The Label will only be complete if it includes CRD as part of the definition because EU institutions will be more attracted to this type of label if it refers to a definition in EU law and not some homemade definition.

“However, the prospect of a move has come a little suddenly and meanwhile there are two work-streams looking at a definition of covered bonds – the Commission green paper on long term finance and the EBA on which covered bonds should be privileged in future.”

Tolckmitt said that these could have “very far-reaching” consequences.

“While it was not the case a year ago, it seems clear today that the definition of covered bonds will change and any reference to CRD in legislation therefore has to change,” he said. “For these reasons it is not understandable why you would make the change to reference the Label to CRD now – when you know it is going to change and you do not know what direction this change will take.

“So Germany is happy to include CRD in the definition, but you always have to look at what is going on around you when you start work like this.”

Ahead of the ECBC’s decision, Luca Bertalot, head of the industry body, said that there are good reasons to follow the regulatory and central bank approaches as indicated by the ECB and EBA. He said that the Label Committee is analysing the pros and cons of the proposed changes and will come back with a final decision soon.

“The Label remains a consensus based initiative and it is important to open the floor for comprehensive debate in the covered bond community and to hear the views expressed by all stakeholders,” he told The CBR, “to ensure macro-prudential added-value and a long term benefit for every single issuer joining the Label.”

Italy beats Germany in deputy chair vote

For the first time in the ECBC’s history there was a contested vote over who will be the future chairman of the industry body at last week’s steering committee meeting.

At the ECBC plenary meeting it was announced that Waleed El Amir, head of strategic funding and portfolio at UniCredit, was elected deputy chairman — a role that within the ECBC’s succession process positions him to become chairman after his two year term as deputy, which runs from the beginning of 2014. El Amir, representing Italy, won the vote after contesting it with the vdp’s Tolckmitt.

“Germany deemed it helpful in this case to have an alternative that has been deeply involved in ECBC affairs over many years,” Tolckmitt told The CBR.

Had he won the vote on behalf of Germany and ultimately become chairman it would have been the first time a country has twice taken leadership of the ECBC, with his predecessor at the vdp, Louis Hagen, having been the first ECBC chairman.

Since then the chairmen have come from France (Patrick Amat of CIF Euromortgage), Spain (Antonio Torío of Santander), and Ireland, with incumbent Paul O’Connor’s term finishing at the end of this year, when he will hand over to his deputy, Denmark’s Carsten Tirsbæk Madsen, executive vice president at BRFkredit.