The European Banking Authority is very likely to recommend further harmonisation of covered bond frameworks via a package of measures including a Directive, according to policy advisor Christian Moor, while the Commission is set to be in a position to move after Q1 2017.

The EBA is, under an ESRB mandate, preparing a final report following up on its June 2014 “best practices” report, and will in this new report make recommendations to the Commission whether it considers further legislative harmonisation is necessary.

The EBA’s Moor said at a European Covered Bond Council plenary in Düsseldorf today (Wednesday) that since the release of the June 2014 report the EBA has been monitoring further developments in covered bond markets. He noted developments such as product innovation, the globalisation of the product, and the way covered bonds interact with other regulations, such as BRRD.

“We are still working on that process, but it looks very, very likely that we will move towards some kind of recommendations to the European Commission that more harmonisation is needed at the EU level,” he said.

He noted that several countries have moved in the direction of incorporating the best practices.

“However,” he added, “we still did feel that not enough jurisdictions took them all on board.”

Moor also cited some convergence in areas such as bankruptcy remoteness and insolvency procedures.

“So we are quite happy with that,” he said, “but we also saw that there was still a wide range of practices and legal frameworks and differences – in special public supervision, transparency, types of cover pools, and everything related to what I would call asset-liability management requirements. So there are a lot of things that are still widely different across European covered bond products – but all these products are getting exactly the same capital treatment, liquidity treatment, etc.

“So based on all these assessments, I do believe that from a prudential perspective, more is needed, and we need to move towards further harmonisation in covered bonds.”

The EBA is currently considering recommendations that would involve three levels:

-          A Directive incorporating core elements of what a regulated covered bond should look like, covering elements such as dual recourse, segregation, bankruptcy remoteness, cover pool administration, liquidity risk, the system of supervision, transparency

-          Criteria necessary to receive preferential capital treatment, ensuring the credit risk of the product is limited, in areas such as LTV limits and minimum overcollateralisation

-          And a third level that would not affect regulatory treatment, but where the EBA sees room for improvement, such as composition of cover pools and valuation issues.

Valeria Miceli, policy officer, banks and financial conglomerates, DG FISMA, meanwhile said that following a delay due to the change in Commissioner responsible for DG FISMA, work on the Commission’s covered bond file is progressing.

A study to inform the Commission’s decision began this month, with Miceli saying this has two purposes: assessing the functioning of covered bond markets in recent years; and weighing the costs and benefits of different harmonisation scenarios.

She said that the final report from the study is expected in the first quarter of next year, after which the Commission will be in a position to take a decision on harmonisation.