A new leaked European Commission draft document on forthcoming Liquidity Coverage Ratio (LCR) regulations seen by The Covered Bond Report includes changes beneficial for covered bonds and supports expectations that favourable treatment will be included in the final version.

The latest leaked draft of the regulation that the Commission is expected to finalise by the end of the month still allows highly rated covered bonds to qualify as Level 1 assets, subject to haircuts of at least 7% and up to a cap of 70% of LCRs – so-called 1B treatment – with most lower rated covered bonds included as Level 2A alongside third country issues.

A criterion that was added in the previous leaked draft, regarding homogeneity of assets, has been removed in the new draft. A new criterion saying that exposures to credit institutions must be compliant with Article 129(1)(c) of the CRR has been added in place of another potentially difficult one, and this is not expected to be problematic.

A transparency criterion – whereby the requirements of Article 129(7) of CRR must be met – has been retained, while there is a recognition that an appropriate alternative to external ratings should be explored – moves that Luca Bertalot, secretary general of the EMF-ECBC, said play into the Covered Bond Label initiative.

“We welcome the efforts made by the European Commission to reduce the overreliance on ratings by offering alternatives to them, for example specific requirements relating to transparency that can be interpreted as an indirect recognition of the Covered Bond Label, in the latest document,” he told The Covered Bond Report.

He also welcomed the overall likely outcome of the Commission’s deliberations.

“We believe that introducing covered bonds in Level 1B will mitigate against over reliance on sovereign debt by the European banking sector and will help to achieve the aim of delinking the sovereign from the banking sector,” he said.