The European Commission is not aiming to have one harmonised framework for covered bonds, Commissioner Jonathan Hill told delegates at a DG FISMA conference today (Monday), but rather seeing whether the adoption of best practices can achieve integration and high quality.

Lord Hill – Commissioner for financial stability, financial services and capital markets union (CMU) – was speaking at a conference in Brussels organised to discuss the Commission’s consultation on possible harmonisation of covered bonds, which he noted was spurred by the increasing variation of covered bond prices during the crisis and the Commission’s desire to understand and address the causes of such market fragmentation.

He said that most respondents to the consultation had said that the greatest cause of price divergence was not differences between national covered bond frameworks, but reflected changes in property and sovereign debt markets. Respondents had meanwhile emphasised how national frameworks with tight legislation and supervision are largely functioning well, he noted.

“So my aim is not for covered bond prices to be the same across Europe or to have one harmonised framework,” said Hill. “Rather, I want to build on national covered bond markets that work well.”

His comments suggest the Commission will not ultimately decide upon a course of action at the more extreme end of the spectrum of options it outlined when launching its consultation paper, which ranged from voluntary convergence based on recommendations to a so-called 29th regime, with direct harmonisation through EU law (a Directive or Regulation) also floated.

“My goal is to see whether the experience, expertise and best practice that countries like Germany, Denmark or France have built up over the years, can be used to create a more integrated market,” said Hill.

He noted that respondents had highlighted that the diversity of covered bond products is valued.

“I too value that diversity and it is something I want to preserve,” said the Commissioner. “There needs to be enough flexibility in the system for new products to be developed in different markets.”

However, he noted that many respondents had called for minimum quality standards or principles that could help improve market discipline and efficiency.

“So I do want to look into whether there is scope to build on what we have already without disrupting existing markets, and help investors compare products, assess risk and invest more outside their own country,” said Hill.”

“More consistent disclosure practices could help investors price covered bonds more accurately, on the basis of the issuer’s financial strength and the quality of the cover pool,” he said. “And we’re keeping a close eye on market-led initiatives to improve transparency in the market as part of our assessment.”