The European Banking Authority (EBA) has called on the European Commission to exclude covered bonds from the scope of Regulatory Technical Standards (RTS) it has been mandated to draw up covering the mortgage lending value (MLV) concept for the purposes of capital allocation.

MLV is defined in CRR Article 4(74) as “the value of immovable property as determined by a prudent assessment of the future marketability of the property taking into account long term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property”, and in covered bonds it can be used as an alternative to market values for the purposes of considering the eligibility of collateral for cover pools.

The mandate the EBA has for developing the MLV RTS relates to the Standardised Approach in CRR, and the criteria would also be used in the context of credit risk mitigation and the large exposures framework, according to the EBA. However, the authority has noted that any criteria it develops for MLV would, under the current version of CRR, also need to be applied in the area of covered bonds and their risk weightings, even if this was not the rationale for coming up with the MLV RTS.

In an opinion published yesterday (Monday), the EBA said that the applicability of RTS it draws up to the valuation of covered bond collateral for the purpose of covered bonds’ eligibility for preferential risk weightings would be “problematic” given its indirect impact on European covered bond markets.

“This Opinion is primarily motivated by the fact that there is a substantial risk of introducing a disproportionate cost on both competent authorities and institutions merely by changing this aspect (i.e. the valuation methodology for assessing MLV) in the covered bond legislation,” it said. “While the EBA sees merits in seeking a more harmonised covered bond market, including harmonisation of the valuation of assets in the pool of underlying collateral, the EBA believes that it would be more appropriate from both a legal and financial stability perspective to take a more comprehensive approach to the valuation methodology used for covered bonds.”

Wolfgang Kälberer, head of the Brussels office of the Association of German Pfandbrief Banks (vdp), said that the replacement of rigorous technical MLV standards that have been developed in the context of national environments – in countries including the Czech Republic, Hungary, Poland and Spain as well as Germany – by a fully harmonised standard could have a negative impact on the quality of covered bonds.

The EBA has advised the Commission that the scope of application of MLV RTS should be limited to the Standardised Approach, the credit risk mitigation framework and large exposures, and that the Commission potentially amend the CRR to limit the scope of the RTS. The authority said that it cannot progress further with its mandate to draw up MLV RTS until it receives clarification on the matter.

Kälberer said that the opinion eases concerns around the issue, and he hopes that any MLV harmonisation – whether or not it extends to covered bonds – follows a principles-based approach with minimum standards rather than full harmonisation.