EC confirms favourable covered bond LCR treatment
Covered bonds’ anticipated favourable treatment in the Liquidity Coverage Requirement was confirmed by the European Commission today (Friday), with the highest rated covered bonds eligible for up to 70% of liquidity buffers as Level 1 assets and others in Level 2A.
The Commission published its Delegated Act today after years of discussion and negotiation during which the role of covered bonds in LCRs has been debated. Under the original Basel Committee on Banking Supervision proposals, covered bonds’ inclusion was restricted to 40% with a 15% haircut, with strict rating requirements, which covered bond proponents argued did not recognise their high quality and would damage some markets.
However, after an extensive lobbying effort by the industry as a whole and individual countries covered bonds have won significant concessions and ultimately favourable treatment – in line with what was expected after the leak of various Commission drafts over the course of this year.
According to the rules released today, covered bonds of ECAI1 can constitute up to 70% of LCRs with a 7% haircut, in Level 1, while ECAI2 covered bonds and ECAI1 covered bonds from outside the EU are included as Level 2A, comprising up to 40% of the liquidity buffers with a haircut of 15%.
The Commission has further included in Level 2B a category of “unrated high quality covered bonds”, which like securitisations eligible for Level 2B can constitute up to 15% of LCRs. The applicable haircut is 30%.
The European Covered Bond Council (ECBC) welcomed how the Commission had recognised covered bonds’ qualities in the terms of the Delegated Act.
“The ECBC welcomes and supports the clear acknowledgement of the strategic importance of the covered bond asset class in the European long-term financing toolkit,” it said. “The ECBC strongly believes that enabling covered bonds to be eligible for Levels 1 and 2A of the LCR will empower banks to diversify their investments away from purely sovereign exposure and, therefore, help to remove systemic risks from the banking system.”
Read the EC’s LCR FAQ here:
