The EMF-ECBC has effectively called for a carve-out of covered bond funding from future EU Net Stable Funding Ratio (NSFR) requirements in an updated position paper, after the European Commission last month asked the EBA to prepare further recommendations by July.

The European Mortgage Federation-European Covered Bond Council (EMF-ECBC) initially published a position paper on NSFR in July 2015, but since then the European Banking Authority (EBA) in December published a report to the Commission recommending the introduction of the framework but highlighting some EU specificities not addressed in Basel Committee on Banking Supervision proposals in October 2014.

The Commission last month asked the EBA for further guidance on topics such as the treatment of derivatives in the NSFR and the application of the principle of proportionality. The Commission is due, if it considers it appropriate, to submit a legislative proposal to the European Parliament and Council by the end of this year, with implementation envisaged around 2018.

The EMF-ECBC said in its final position paper – which it submitted to the Commission and EBA today (Wednesday) – that it welcomes the EBA recommendation that certain EU specificities should be taken into account in the transposition of the NFSR into the EU banking framework, including pass-through models.

“The EMF-ECBC supports the option for national supervisors to identify assets and liabilities which are interdependent and set the Required Stable Funding (RSF) and the Available Stable Funding (ASF) to zero for such assets and liabilities,” it said.

Such a move could effectively neutralise the impact of otherwise negative consequences of the NSFR on covered bond funding, given that the EMF-ECBC further argues that a wider range of models should be covered than envisaged by the Basel Committee or EBA.

“We welcome the EBA recommendation that fully matched funded amortised mortgage lending should receive the same treatment as interdependent assets and liabilities as envisaged in the Basel Standard (para. 45),” it added, “but believe this treatment should be extended to all situations where the matching principle exists in law.”

The EMF-ECBC then defines this in such a way that captures all covered bonds.

• Issuers are required by law to segregate cover assets and covered bonds from other assets and liabilities, i.e. the assets and liabilities are clearly identifiable.

• Covered bonds are secured by a first claim on the cover assets. In a bankruptcy scenario payments on cover assets must primarily be used for the payment of interest and principal on covered bonds, i.e. the principal payment flows from the asset cannot be used for anything else before the repayment of the liability.

• In some jurisdictions, payment imbalances on cover assets and covered bonds are capped by law (matching principle), for instance by way of a maximum duration gap. The proceeds on the cover assets therefore balance the interest and principal payments.

The industry body also addresses how NSFR proposals should be changed should such a broad carve-out not materialise, highlighting previously-identified aspects of the proposed framework that it considers – in its current form – would unduly restrict the covered bond market and, as a result, long term financing.

These include:

• the potential for derogation from the NSFR on an individual institution basis where the institution is part of a group/sub group;

• the adjustment upwards of ASF factors for covered bonds with a residual maturity of less than one year;

• the need for identical treatment of mortgages in terms of RSF weighting, regardless of whether they are funded through covered bonds or not; and

• the recognition of the secured nature of the asset in the assignment of RSF factors to swap agreements on covered bonds.

“The tailored and proportionate EU implementation of the Basel III framework is vital for the viability of the mortgage and covered bond industries, all the more so in light of the advent of yet more regulatory change in the form of ‘Basel IV’,” said Luca Bertalot, EMF-ECBC secretary general. “Appropriate liquidity and capital requirements will be determinant for the role the industry can play in supporting not only growth, but also in meeting the EU’s energy targets.”