The European Banking Authority on Thursday confirmed in a response to an enquiry that covered bonds containing public sector securitisations will not be eligible for preferential risk weights.

The EBA clarified the treatment of such covered bonds in a Single Rulebook Q&A after a question was submitted in July: Would UCITS compliant covered bonds containing public sector securitisation exposures qualify for preferential risk weights under Article 129 of Regulation (EU) No 575/2013 (CRR)?

The EBA answered: “UCITS-compliant covered bonds containing public sector securitisation exposures do not qualify for preferential risk weights under Article 129 of Regulation (EU) No 575/2013 (CRR), as public sector securitisation exposures are not eligible assets under Article 129 (1) of CRR.”

As background to the question, the EBA noted: “Article 129(1)(a) of CRR states that covered bonds can be collateralised, inter alia, by ‘…exposures to or guaranteed by central governments, central banks, public sector entities, regional governments and local authorities in the Union’. However, the text does not mention that securitisation positions resulting from the securitisation of exposures to the public sector can qualify as covered assets, and a look through approach is not possible in this context. Only securitisation exposures to residential and commercial mortgages are explicitly mentioned in Article 129(1)(d) (ii) and (f) (ii) of CRR, and in each case there are specific criteria that must first be fulfilled for such securitisation exposures to qualify.”

An analyst today (Monday) suggested that the clarification could affect Depfa ACS with a cover pool that includes US FFELP student loan ABS.

“The underlying assets benefit from central or regional government support,” he said. “However, given the relatively low rating of Depfa ACS and privatisation risk, most banks have likely been cautious for quite some time already.”