A leaked document from European Commission staff confirms Danish statements that certain covered bonds will be treated as Level 1B in LCRs, and also indicates that Level 2 criteria will be less stringent than proposed under the Basel III framework.

The document from DG Markt staff is aligned with statements from two Danish ministries last week that said certain covered bonds could comprise up to 70% of LCRs with a 7% haircut (see article here). This would apply to covered bonds that are CRD/CRR-compliant, rated at least AA-, have a minimum size of Eu500m or equivalent, and subject to mandatory overcollateralisation levels and maximum LTVs.

Furthermore, covered bonds eligible in a position broadly consistent with Level 2A of the Basel framework could be rated as low as A-, rather than AA- as laid down by the Basel Committee on Banking Supervision. The size limit is also lower than for Level 1B, at Eu250m. Level 2A covered bonds would still be subject to a 40% limit and 15% haircut as under the Basel proposals. The 70% limit would apply to the aggregate of covered bonds eligible as Level 1B or 2A.

The document states that it reflects the preliminary views of DG Markt and is not a draft delegated act.