A Spanish regulation and financial policy official in the Ministry of Economy & Competitiveness said that his department will encourage the government to proceed with reforms to the country’s covered bond framework after December elections, but noted that a key OC issue remains unresolved.

Alberto Martín del Campo Sola, department director, regulation and financial policy, at the Spanish Ministry of Economy & Competitiveness, explained at an ECBC plenary on Wednesday that the plan to change the Spanish framework was inspired by a European Banking Authority report in July 2014 on best practices in covered bonds.

“So we decided to make a reflection with the industry on the way forward to adapt the regulation of the covered bonds in Spain,” he said.

Del Campo added that any reforms needed to be made very carefully since cédulas hipotecarias had worked “rather well”. A public hearing was held in October 2014 and the Ministry received some 23 responses.

With elections coming up at the end of the year in Spain, it is difficult to give a timetable for the reforms, said del Campo. However, he added that after the elections his department will encourage the government to consider moving forward with them.

Del Campo listed seven topics that were dealt with in the Ministry’s consultation and summarised the feedback (which The CBR has summarised further):

- How to reduce asset encumbrance: there is a consensus that such a reduction is needed, but questions remain as to how this will affect the level of eligible overcollateralisation (OC).

- Segregation of the cover pool post-insolvency: respondents said this should be done simply with an on-balance sheet solution.

- Revaluation of assets: the consensus was that this should happen, but the question of how to do so remains open.

- Modification of eligible assets: respondents said that with respect to SME loans, one of the most important potential asset classes, it is not clear that this is feasible given their heterogeneity.

- Liquidity rules: respondents were in favour of some kind of rules, but there was no consensus on these.

- Transparency rules: the consensus was in favour.

- Asset pool monitor: respondents were in favour of this, but there were questions over who it should be, particularly with regards to conflict of interest.

He said that the feedback would feed into a new draft of the reforms.

Lorena Mullor, manager at the Spanish Mortgage Association (Asociación Hipotecaria Española, AHE) and moderator of a panel discussion on the topic, noted that one of the most controversial aspects of the reforms is how a reduction in overcollateralisation resulting from covered bondholders no longer having a claim over an issuer’s whole mortgage book (and not just the eligible cover assets) will be handled, even if other parts of the reform balance this out.

Juan Pablo Soriano, managing director, EMEA covered bonds and country manager, Spain, at Moody’s, acknowledged that all the measures being proposed to align the framework with the EBA best practice guidelines are clearly credit positive. But he said that any moves to reduce asset encumbrance – benefiting senior unsecured bondholders – would bring down OC, and that to any investor a simple reduction in OC is credit negative. He said that the question of how this would be handled in a transition from the existing framework to a new framework is particularly important. Soriano nevertheless noted that Spain has room for manoeuvre given the high level of excess OC in Spain.

Agustin Martín, head of European credit research, ABS and covered bonds, at BBVA, said that it is right that the Spanish framework should be brought into line with other European frameworks, and agreed that having OC calculations relative to the cover pool and to the total mortgage book no longer makes sense in a bail-in world. However, he stressed that investors should easily understand how the credit positive measures being undertaken at the same time work in their favour.

Del Campo acknowledged that the Ministry has not found a clear way to address the transition problem. He said that while some favour a “big bang” approach, where all cédulas convert from the old framework to the new, others favour a grandfathering clause. He said that he understands that this is one of the most important aspects of the reforms and added that the Ministry will have to have a lot of discussions with the industry.

Photo: Spanish parliament, Madrid; Source: Luis Javier Modino Martinez/Wikimedia Commons