Harmonisation was a key theme at a European Covered Bond Council plenary meeting in Paris this (Thursday) morning, with investors and regulators discussing the pros and cons of any such efforts at a European level, and a central banker asking whether it is necessary.

Marriott, Champs Elysées, Paris, the ECBC plenary venue

François Haas of the Banque de France – speaking, like other panellists, in a personal capacity – said that while standardisation might be a long term goal, the diversity of legal frameworks today is also a plus for the covered bond brand. He cited three aspects of the diversity: that it reflects the underlying characteristic of different national financial systems; that it provides for competition between jurisdictions that can lead to state of the art standards; and it means covered bonds reflect a slice of the respective national economy, which is interesting for investors.

Haas noted that the diversity of covered bonds had not hindered the internationalisation of the asset class, leading to the thought “If it’s not broken, why should we fix it?”

Members of a subsequent panel focusing on the topic of harmonisation were asked by moderator Frank Will, head of covered bond research at HSBC, if they expect to see a EU covered bond framework any time soon. While some did not expect such a development during their working lives – with one saying not for 20 years – Clément Royo of the Autorité de Contrôle Prudentiel et de Résolution (ACPR) said he wouldn’t be so sure about that. He said that while the Single Resolution Mechanism (which had been discussed in detail on an earlier panel) might not change the banking landscape very much, it could lead to dramatic change over five to seven years, and that the question might be more easily answered then, a sentiment echoed by Christian Moor of the European Banking Authority.

Arnaud-Guilhem Lamy of BNP Paribas Asset Management said that if there is harmonisation it should be to make standards better.

Citing a minimum overcollateralisation level of 25% for Spanish cédulas hipotecarias, he said that a lowering of this to 1% or 2% to bring it into line with an EU standard would be a problem for investors, while issuers in other jurisdictions would probably not accept a requirement to increase their OC levels to 25%. He said that a move such as a lowering of Spain’s 25% OC level would be a threat to covered bonds, hitting investors’ trust in covered bond laws and given investors’ need for stability. However, he noted that a EU framework could be introduced alongside national frameworks.

Lamy said that were harmonisation to proceed, top of his wish-list of covered bond characteristics to be standardised would be their dual recourse nature. He would like to see recourse in the case of specialised covered bond institutions being not only to that issuer but also to the parent bank. He said that while the splitting off of specialised institutions from their parents had so far happened in the best interests of investors, it could have a negative outcome.

Luca Bertalot, head of the European Covered Bond Council, said that the industry body has set up a taskforce comprising national representatives to explore harmonisation, saying that this shows how seriously the ECBC is taking the development.

Haas had earlier noted the importance of frameworks being updated and in this regard highlighted an imminent update to the French legal framework, which Nicolas Govillot of the French Ministry for the Economy & Finance said was to make France’s covered bonds even more robust.

The changes, which should be finalised in the coming months, were not outlined in detail but involve: limiting maturity mismatches between covered bonds and cover assets; increasing minimum OC from 2% to 5%; and limiting the exposure of issuers to parent groups. (See separate article.)

Govillot noted that, following previous changes to the French framework, there is no intrinsic difference between the assets eligible to back obligations foncières and obligations de financement de l’habitat and that the country could therefore end up with the two products becoming one at some point in the future. He said that harmonisation is not currently foreseen but “it is in the air”.