The Basel Committee’s Net Stable Funding Ratio (NSFR) could hinder the covered bond market and hence banks’ access to long term funding, the ECBC said today (Monday), arguing that current proposals do not acknowledge the security offered by the instrument.

In a position paper published to coincide with the preparation of a European Banking Authority (EBA) report on stable funding sources and an assessment of the NSFR’s impact on banks’ business and risk profiles, the European Covered Bond Council (ECBC) said the current wording of the NSFR displays a two-tiered bias in favour of other funding sources over covered bonds.

On one level, the NSFR favours deposits over capital market funding because of the Basel Committee on Banking Supervision’s assessment that deposits are a more stable source of funding, therefore assigning them more favourable factors, the ECBC said.

This preference is theoretically debatable, the ECBC argued, and might foster a practical overreliance on deposits.

On a subsequent level, the industry body added, the NSFR favours unsecured over secured debt. On the assets side, by focusing only on maturity the proposals fail to acknowledge the heightened security offered by the cover pool, the ECBC said, while on the liabilities side it makes the issuance of secured debt relatively more expensive, in terms of NSFR ratios, due to the encumbrance “discount” assigned to mortgages in the cover pool.

To curb the perceived disparity of treatment between secured and senior unsecured debt, the ECBC argued, cover pool assets should be considered unencumbered, noting that the in the Basel Committee’s reform proposal framework an identical mortgage would receive a better weighting if backed by unsecured debt than by a covered bond.

This goes against the principle of a level playing field and is detrimental for covered bond issuers, especially specialised ones, the industry body said.

“Covered bonds are at the heart of the financial tradition of Europe, having proven to be a cost-effective and reliable long term funding debt instrument,” said Luca Bertalot, secretary general of the EMF-ECBC. “They played a pivotal role in bank wholesale funding during the recent financial turmoil.

“The NSFR, if not sensibly fine-tuned, might hamper covered bond markets and, in doing so, unduly restrict long term financing.”