A green paper released today (Wednesday) outlining the EC’s Capital Markets Union agenda includes the development of a more integrated European covered bond market in measures aimed at improving access to finance, as expected, but now also links this to “experience gained from well functioning national frameworks”.

Jonathan Hill, commissioner for financial stability, financial services and Capital Markets Union unveiled the widely-trailed green paper today.

“The direction we need to take is clear: to build a single market for capital from the bottom up, identifying barriers and knocking them down one by one, creating a sense of momentum and helping to spark a growing sense of confidence in investing in Europe’s future,” reads the document.

“The free flow of capital was one of the fundamental principles on which the EU was built. More than 50 years on from the Treaty of Rome, let us seize this opportunity to turn that vision into reality.”

Priorities listed include: lowering barriers to accessing capital markets; widening the investor base for SMEs; building sustainable securitisation; developing European private placement markets; boosting long term investment.

The key section on covered bonds reads:

“The development of a more integrated European covered bond market could contribute to cost-effective funding of banks and provide investors with a wider range of investment opportunities. The success of covered bonds as funding instruments is closely linked with the development of specific national legal frameworks. The Commission will consult in 2015 on the merits and potential shape of an EU covered bond framework and present policy options to achieve greater integration in covered bond markets, based on experience gained from well functioning national frameworks. The Commission will also reflect on whether investors should be provided with more information about the collateral underlying covered bonds and other structured debt, similar to loan data disclosure requirements on structured finance instruments.”

Although most of this is in line with a previous leaked draft of the green paper, the wording “based on experience gained from well functioning national frameworks” has subsequently been added and its inclusion is understood to have come following further dialogue between industry and Commission representatives.

An accompanying staff working document, “Initial reflections on the obstacles to the development of deep and integrated EU capital markets”, expands upon some of the issues identified by the Commission.

“Although covered bond markets have remained relatively resilient in recent years, the crisis revealed fragmentation in European secondary markets, as pricing of covered bonds varied significantly depending on the Member State of issuance,” it reads. “Access to new issuance became difficult in particular for smaller issuers.

“In the EU, 26 Member States have passed covered bond legislation, but harmonisation has been limited to the prudential aspects of these instruments. The presence of well-developed national frameworks did not stop European markets from fragmenting along jurisdictional lines during the crisis. A lack of clarity for investors over the legal requirements in different Member States or actual differences between national covered bond regimes may have actually contributed to this trend.”

The Commission’s work on a potential securitisation framework for the EU is dealt with in a separate consultation that will run in parallel with one for the green paper. In the consultation document, the post-crisis experiences of securitisation and covered bonds are contrasted.

“The slow recovery in EU securitisation markets reflects concerns among investors and prudential supervisors about the risks associated with the securitisation process itself,” it reads. “In contrast, investors in Europe have generally preferred covered bond instruments.

“This may have been due to the existence of well-developed national frameworks being in place and the higher degree of guarantee offered by their dual recourse nature (where the claim can be made to both the underlying pool of assets and on the issuer). This is in contrast to securitisation which offers recourse only to the underlying assets.”

The consultation periods will run until 13 May, and after a conference in the summer the Commission plans to release an action plan on Capital Markets Union in the second half of the year. The Commission’s aim is to have the “building blocks” necessary for a “fully functioning” Capital Markets Union in place by 2019.

A distinct paper dealing with covered bonds is expected after the end of the green paper consultation period. In the meantime, the European Covered Bond Council (ECBC) will be hosting events on the role of covered bonds in long term finance and CMU in Brussels on Tuesday and Wednesday.

“The covered bond community shares the Commission’s objective of facilitating the long term financing of the European economy in the interest of financial stability, job creation, and economic prosperity,” said Luca Bertalot, EMF-ECBC secretary general. “Through the work of its taskforce on long term financing, the ECBC is already actively discussing many of the issues raised by today’s green paper on CMU and next Wednesday it will meet with over 20 national authorities/international bodies in order to take forward this debate.”

Photo: Jonathan Hill at the launch of the green paper today; Source: European Commission