Industry bodies representing institutional investors and others voiced support for the harmonisation of covered bonds in responses to a consultation on a European Commission Capital Markets Union (CMU) green paper, but several cautioned against harming proven frameworks and acknowledged limits to what can be achieved by regulatory standardisation.

The consultation – which covers areas such as long term finance, securitisation and SMEs – was launched with the release of the green paper on 18 February, closed on 13 May, and the responses appear to have been published yesterday (Wednesday).

The Commission said in the green paper that the development of a more integrated European covered bond market could contribute to cost-effective funding for banks and provide investors with a wider range of investment opportunities. It said it will this year consult on the merits of an EU covered bond framework.

Releasing the feedback, the Commission said it will now prepare an Action Plan in relation to CMU for September, while it has since February said that it will publish a consultation paper on covered bonds this month.

Among the consultation responses, the German Insurance Association (GDV) said that strong fragmentation and very heterogeneous regulation in individual Member States makes it difficult for investors to compare and appropriately assess the risk characteristics of cover pools “with reasonable efforts”.

“From an investor’s point of view, broadening and deepening the markets for covered bonds through an appropriate harmonisation would be highly welcome,” the association said in its response. “Introducing uniform standards for different types of bonds could be a major step in the process of creating a ‘single market’ for covered bonds.

“This holds particularly true for the harmonisation of quality and information standards, since it would significantly reduce the analytical efforts and expenses of the investors. A cross-border harmonisation of covered bonds would make it easier for investors to compare the bonds, irrespective of the country where the issuer is located.”

Investors could benefit from a significant extension of investment options, said the GDV, whereas issuers could benefit from a larger investor base.

The GDV also stressed that harmonisation should not put “existing and well proven” standards and financial instruments at risk, nor risk or interfere with investor protection, citing – alongside a few other respondents – the example of the German Pfandbrief.

“In particular the German Pfandbrief, which already has a long and proven track record and very high standards regarding quality and investor protection, needs to be maintained,” said the association. “A harmonised European covered bond regime should neither replace national bond types and the German Pfandbrief, nor should it be based on the lowest common denominator.”

The industry body Insurance Europe also argued in favour of harmonisation “leveraging” proven national frameworks, saying that this would result in a larger investor base and greater liquidity.

The Federation of Dutch Pension Funds (Pensioenfederatie) said that a harmonised framework for covered bonds could greatly increase the appetite for the asset class of the institutional investors it represents. However, acknowledging the obstacles and challenges to harmonisation across national jurisdictions, it suggests several areas that a harmonised framework cover:

“Creating a legal level playing field on: overcollateralisation, haircuts, valuation, legal position bondholder, treatment residual debt, and any other obligations for bondholders; Set accounting standards for bondholders; Set flexible but clear collateral requirements; Covered bonds should at least be rated by two rating agencies; Clearly state any additional terms in a term sheet; Appointment of a pool administrator to manage cover pools (as is the case in, for example, Germany); Mortgage loan eligibility should be based on current market pricing of the underlying collateral (and not on market pricing at origination).”

The issue of different insolvency regimes across the EU was raised in the consultation paper and highlighted by several respondents as an obstacle in various areas. In relation to covered bonds, for example, it was picked up on the issuer side of the market by the Association of Danish Mortgage Banks (Realkreditrådet).

“As regards the emergence of true pan-European covered bonds markets,” it said, “these would be facilitated with a pan-European insolvency framework concerning both covered bonds issuers and borrowers. As for covered bonds issuers, an insolvency regime has to be constructed with particular caution in order to ensure that the question of default of covered bonds is treated fully separated from, and is not triggered by, the default of the issuer.

“Other covered bonds specificities also have to be taken into account when developing an insolvency regime, and in case if the Commission pursues with this file, we recommend that the Commission undertakes a study on the existing insolvency regimes in those jurisdictions which represent strong covered bonds regimes.”

The French Federation of Insurance Companies (FFSA), argued in a more general comment in its responses that market-driven convergence should always be preferred to any additional regulation, citing covered bonds as a supporting example.

“The development of a harmonised framework in the field of covered bonds, which is already a rather liquid and cross-border market, is a good example of what can be achieved in terms of market convergence,” said the federation.

However, the Advisory Committee of the Spanish National Securities Market Commission (CNMV) – in a rare public response on the part of financial authorities – raised the prospect of a pan-European framework being introduced alongside national frameworks when highlighting covered bonds as a product in need of standardisation, saying that differences between individual jurisdictions had contributed to fragmentation.

“The Advisory Committee of the CNMV would not see as a problem the use of a 29th regime (i.e. optional single regime established by a EU legal act) for specific classes of ‘plain vanilla’ widely-traded securities, as an alternative to compulsory standardisation.”

The Commission received 422 responses to the consultation, of which some 375 have been made public (respondents were able to state whether they wished their responses to be public or not).

We have previously covered the European Covered Bond Council’s response.