Potential negative consequences of “far-reaching” harmonisation have been highlighted in responses from investors, regulatory authorities and the industry alike to an EC consultation on covered bonds, even if some benefits and support for a Directive were cited.

Launched on 30 September, the consultation set out three options for moving towards a more integrated European covered bond market: 1. Voluntary convergence of Member States’ covered bond laws in accordance with non-legislative coordination measures such as a Commission recommendation; 2. Direct harmonisation of national laws through EU law (Directive or Regulation) on covered bonds; 3. 29th regime as an alternative to existing national laws.

(Options 2 and 3 have also been referred to as 2a and 2b (by the ECB, for example), but respondents saying they are supportive of “option 2” have tended to do so while rejecting a 29th regime.)

The consultation closed on 6 January and the Commission said that 72 responses were received (some of which The CBR has covered previously) and 61 have been made public.

Investment firms and investment associations noted benefits of harmonisation, but equally stressed that, in the words of Insurance Europe, the Commission “not disrupt these well-functioning markets”.

“While insurance companies agree that, in some cases, harmonisation could encourage and facilitate additional cross-border investment, they also recognise that they appreciate the diversity of the covered bonds markets,” said the industry body. “Most importantly, insurers would definitely not support the facilitation of more cross-border investment at the cost of losing important features of existing national regimes.

“Harmonisation, for example via far-reaching EU legislation, triggering adaptions, amendments or recasting of existing national covered bond legislations could produce unintended consequences,” it added, “damage well-functioning covered bond instruments and neutralise any potential benefits of the initiative.”

These sentiments were echoed by others including the German Insurance Association (GDV) and Amundi.

The Dutch Investors’ Association nevertheless said that a Directive or Regulation in line with EBA best practices is necessary to achieve the targeted harmonisation of certain minimum standards, with a recommendation on its own being insufficient as it does not provide legal certainty to investors.

“While some Member States already have solid frameworks in place,” it added, “this is not true for others.”

The UK-based Investment Association also said that a 29th regime could be developed as a stronger option than “the weaker covered bond frameworks of some Member States”. However, it said it encourages work on voluntary convergence and does not support a single framework.

Pioneer Investments said it prefers option 2, but notes that this is only of benefit if “led by the highest standards and not by compromises, so to make covered bonds stronger and not weaker”.

Governments and regulatory authorities were also cautious in their support of harmonisation, underlining the need for flexibility to reflect national differences.

“We agree with further convergence at the EU level in order, amongst others, to further protect the interest of the investors and facilitate the funding of credit institutions,” said the Banque de France, for example. “In this regard, we believe that the general orientations given by the EBA with a special focus on common safety, soundness and risk weight principles should be followed. However, we are not convinced by the necessity and the benefits of developing a unique regime whereby national legislations would fully converge.”

The Danish Ministry of Finance said it supports a Directive but not a Regulation, while the Swedish authorities (central bank, FSA and ministry of finance) – in line with the Association of Swedish Covered Bond issuers – said the best way forward is through indirect, voluntary, non-legislative co-ordination measures based on high standards and best practices.

“Complete legislative harmonisation could impose risks to today’s well-functioning covered bond markets which could have implications for the financial stability. Further, a complete EU harmonisation of all rules relevant to covered bonds could also conflict with existing national legislations in other fields, creating ambiguities in legislation. As a result, harmonisation of covered bonds may in practice lead to different end-results in different jurisdictions.

“Therefore, any coordination measures must be based on the national frameworks that worked well during the financial crisis and must not lead to a watering-down of covered bond frameworks. The regulation should not undermine the low risk aspect of existing covered bonds.”

The Bank of England meanwhile gave prominence to the preferential treatment of covered bonds relative to securitisation.

Covered bond and banking industry association responses – such as those from Finance Norway, the French Banking Federation and the UK Regulated Covered Bond Council – generally favoured option 1, but also echoed the European Covered Bond Council response of being supportive of a combination of recommendation and Directive.

The bank and insurance division of the Austrian Federal Economic Chamber noted that “full harmonisation is almost impossible to achieve”.

In one of only a handful of published responses from outside the direct financial industry and its regulators, the European Community Shipowners’ Association argued that ship covered bonds should not be excluded from any harmonised framework.

The responses can be found here:

https://ec.europa.eu/eusurvey/publication/covered-bonds-2015?language=en