Draft conclusions of the Council of the European Union on long term finance that could be adopted on Tuesday call for convergence in regulatory approaches to covered bonds, but without harmonisation damaging the instrument’s success, as the Juncker Commission’s agenda develops.

The role of covered bonds in long term finance and their potential harmonisation has been on the agenda since a green paper on the long term financing of the European economy was published in March 2013. The new European Commission under president Jean-Claude Juncker has meanwhile put growth projects and plans centre stage, for example announcing a Eu315bn investment package on Wednesday of last week (26 November), while on 6 November, shortly after being installed, the Commission held a high level conference, “Finance for Growth: Towards a Capital Markets Union”.

In this context, the EU Council has been discussing related topics, including covered bonds, and on Tuesday the general secretariat of the Council sent out a document with draft conclusions on finance for growth and the long term financing of the European economy, recommending that these be adopted at a meeting on Tuesday.

Among 36 points listed, the document highlights some areas in which it says work should start soon, including:

“Moving towards convergence in the regulatory approaches to covered bonds, in particular through enhanced transparency and data disclosure requirements, whilst preserving the efficiency and quality reached in relevant national markets”

The draft later includes a section on covered bonds, including three statements (quoted in full with the document’s capitalisation): that the Council:

“HIGHLIGHTS that a number of Member States have established very successful regulated covered bond markets, and CONSIDERS that further progress is possible with regard to EU-wide market integration, cross-border issuance and holding of covered bonds, as supported by the convergence of relevant rules;

“WELCOMES the Commission’s intention to examine the feasibility, costs and benefits of harmonised EU covered bonds framework; however, STRESSES that such a framework should not come at the detriment of the already thriving covered bond markets, but should rather build on those experiences and preserve and promote high standards and best practices;

“FINDS that consideration of the pros and cons of a possible covered bonds framework could be launched in parallel to the ongoing work on securitisation markets, with a view to ensuring proper coordination and consistency with the future regulatory framework, without prejudice to the higher priority attached to the securitisation framework; and STRESSES that the outcome should ensure that the resulting regulatory regimes appropriately reflect the risk-return profiles of these instruments.”

Writing in the latest issue of European Covered Bond Council newsletter Mortgage Info, published last week, EMF-ECBC secretary general Luca Bertalot noted that the examination of how covered bonds are treated in legislation was highlighted by Jonathan Hill (pictured), the newly-appointed European Commissioner for Financial Stability, Financial Services and Capital Markets Union in his maiden policy speech at the Finance for Growth event.

Bertalot noted that overall the conference highlighted what will be the priorities for European institutions in the coming year, with three topics raised that have “a direct and substantial impact” on the covered bond and mortgage industry.

“First, covered bonds play a key role in the overarching topic of long term financing, as they provide banks with a reliable and secure means of funding their lending operations over long term horizons,” he said. “This has been the case for many years in Europe and covered bonds will continue to play this central role in sustaining long term funding in the future.

“Second, the conference highlighted the fact that covered bonds will remain in the focus of regulators, who are preparing a number of legislative initiatives that see covered bonds as a major financial instrument in the renewed financial landscape of Europe. Third, covered bonds and their unique and secure structure will be an important model in inspiring the process of creating alternative European funding tools.”