A covered bond consultation paper due in the coming weeks is set to reflect the Juncker Commission’s strategy of limiting new regulation and favouring market initiatives, with full harmonisation “off the table”, according to Luca Bertalot, EMF-ECBC secretary general.

The European Commission is launching the consultation paper as part of its Capital Markets Union (CMU) agenda and it comes after the close of a consultation on a wider-ranging green paper. The Commission has said that the covered bond consultation paper will come out in June, but while it is still expected before the summer holiday season it could now be delayed until early July.

In late April a Commission official said that there was no consensus on the shape of any proposals that should be included in the consultation, but The CBR understands that the paper is almost ready.

The prospect of a high degree of harmonisation had been raised with the preparation of the consultation paper, but maximum harmonisation is now “off the table”, according to Luca Bertalot, secretary general of the EMF-ECBC (European Mortgage Federation-European Covered Bond Council), which held meetings last week with the cabinet of Jonathan Hill, Commissioner responsible for Financial Stability, Financial Services and Capital Markets Union.

This would be in line with the stated position of key Commission representatives. Lord Hill has stressed that the approach of the Juncker Commission is to only regulate where necessary, while Mario Nava – who unveiled covered bonds’ eligibility as LCR Level 1B assets – has consistently highlighted the resilience of the asset class through the crisis.

“We understand that there was an appreciation of the work done by the ECBC so far because our work is going exactly in the direction of the Commission, that is to say a market initiative,” said Bertalot. “They want to understand how the different markets are working and they are ready to listen to the market.”

The ECBC last week pre-empted the prospect of harmonisation in the consultation paper by announcing that the disclosure template for the Covered Bond Label will be harmonised across jurisdictions, with transparency having been one area the Commission had already identified as an area where standardisation could occur. The industry body is now preparing to respond to the consultation paper and anticipates a principles-based approach.

“The ECBC will collect the views of the different active covered bond markets in Europe,” said Bertalot, “as the Commission is trying to see what are the best practices regarding what performed well during the crisis and if it will be possible to implement some of these in markets where they are not already implemented.”

The industry body has meanwhile proposed two versions of so-called European Secured Notes (ESNs), potential dual recourse instruments that could be backed by loans to small and medium-sized enterprises (SMEs), as a contribution to the Commission’s wider CMU initiatives that seek to spur growth.

“The strategic importance of covered bonds is very clear in the mind of the European Commission,” said Bertalot. “There is no intention to jeopardise any functioning market.

“The Commission is also very aware of the implication of the Basel debates – on NSFR, risk weightings, capital floors, the leverage ratio,” he added, “and is very keen on securing the European characteristics in these discussions.”

It is understood that in late September, during the consultation period that will follow the release of the paper, the Commission will also hold a public hearing on covered bonds.

Photo: Mario Nava (left) and Jonathan Hill