ECB role under SSM discussed in light of supervision differences
The way in which special public supervision of covered bonds differs across jurisdictions and the role the ECB might play in this in light of the Single Supervisory Mechanism (SSM) were highlighted in a panel including representatives of BaFin and ACPR last week at the 18th Central European Covered Bond Conference organised by the Estonian Banking Association and the vdp in Tallinn.
Florian Hillenbrand, senior credit analyst at UniCredit and moderator of the discussion, highlighted that as a part of fulfilling UCITS criteria, the basis for the CRR, covered bonds having “special public supervision” is key to getting advantageous regulatory treatment and being eligible for the European Central Bank’s third covered bond purchase programme.
“This is an integral part of the overall quality of a covered bond,” he said.
However, there are “extreme differences” in how countries define this, according to Bernd Volk, head of covered bond research at Deutsche Bank, who said that tables that have a tick box for denoting whether or not special public supervision is required in a jurisdiction are therefore of little value.
“What does it mean in reality?” he asked.
The European Banking Authority in July published a report on covered bonds – delivering on mandates from the European Commission and European Systemic Risk Board – and Volk noted that this had highlighted differences between Germany and the Netherlands, for example, with other countries meanwhile appearing to rely more on general banking supervision. He said that it is an area that the EBA is pushing for standardisation in.
“I’d argue that the SSM will support this trend of introducing more specific requirements and making it more homogeneous,” said Volk, “and that is positive for investors.”
Hillenbrand noted that despite being so important, special public supervision did not appear to be given a lot of importance in rating agencies’ analysis of covered bonds.
Roberto Paciotti, managing director at Standard & Poor’s, acknowledged that under S&P’s methodology there is no direct link between the rating and any judgement on special public supervision. He said that supervision is one element that S&P considers in its analysis, but that it is “a given” for covered bonds. He noted that under proposed changes to S&P’s methodology, the “robustness” of a legal framework is considered in the jurisdictional support element of S&P’s analysis – but again said that as this is deemed “very strong” in almost all countries it is not a differentiating factor.
He meanwhile agreed with Volk that the SSM would help the homogeneity of covered bonds and that this wold be positive for the product.
Florian Delva, supervisor, Autorité de contrôle prudentiel et de resolution (ACPR), said that special public supervision is and will be carried out at a national level given that legal frameworks are national, although the involvement of the ECB in addition to this would be welcomed.
Martin Bourbeck, principal expert, BaFin, agreed, saying that it makes sense for someone nearer the respective national frameworks to retain supervisory responsibilities, apart from for elements of supervision that are very broad. He noted that for the time being, EU law simply requires special public supervision as a precondition for certain regulatory benefits; it does not require transposition of requirements pertaining to that special public supervision in detail.
Consequently, special public supervision of covered bonds is not understood to be one of those prudential supervisory tasks covered by EU law in either a Regulation or national acts transposing a directive, and therefore is not understood to be conferred upon the ECB, said Bourbeck.
“They have the say on supervising the issuer, including the assets that happen to be cover assets as well as the liabilities that happen to be covered bond liabilities, but – for the time being and given the way EU law deals with covered bonds – they are not meant to execute special public supervision as provided for in the national covered bond regimes,” he said.
Special public supervision of covered bonds typically involves supervision of compliance with requirements of the non-harmonised national covered bond framework prior to issuance, ongoing during the life of the issuer, and – especially knitted into the fabric of national covered bond regimes – when it comes to prompt corrective action and early intervention/crisis management measures, and might ultimately lead to safeguarding the ring-fencing mechanism provided for in national law in the insolvency or resolution of the issuer, he added.
However, Bourbeck said it is natural for the ECB to take an interest in covered bond supervision given its interest in covered bonds and that many issuers are now directly supervised by the institution. He also said that the more that covered bond rules are harmonised, the more it becomes likely that a single supervisor such as the ECB would want to have a voice in their supervision.
Wolfgang Kälberer, head of the Brussels office of the Association of German Pfandbrief Banks (vdp), forecast that the ECB’s influence in this area is some years off, and that the institution would need to build up covered bond know-how. However, he expects the ECB to be involved in some workstreams, for example where systemic aspects are involved or where business models are examined.
He said that of related but more immediate importance are complementary CRR Article 129 rules that the European Commission will table at the end of this year. These will deal with the supervision of cover pools prior to issuance, on an ongoing basis, and post-default, and Kälberer said that they will have more visible results than any ECB influence.
The panellists also considered that the ECB’s role in bank resolution and how this would fit with the fate of covered bonds and the role of their administrator needs to be explored, noting that the central bank’s position could result in a conflict of interest.
Further details of the conference proceedings can be found here:
