The European Banking Authority (EBA) agrees that a partial waver of CRR requirements relating to substitute collateral can be justified for covered bonds in Germany and Poland, it announced yesterday (Tuesday), in light of significant potential concentration problems in both markets.

Under Article 129(1)(c) of the Capital Requirements Regulation (CRR), exposures to credit institutions used as collateral for covered bonds (which are to achieve risk weight preferential treatment) up to 15% of the nominal amount of outstandings of an issuer must be credit quality step 1 (CQS 1) – i.e. at least AA-.

However, competent authorities are able to partially waive this requirement and allow CQS 2 up to 10% of the total after consulting with the EBA, if there is significant potential concentration problems in the relevant member state.

Germany’s BaFin submitted a notification of its intention to implement the partial waiver to the EBA in December 2014, and the Polish FSA (KNF) did likewise last October.

In response, the EBA announced in opinion papers yesterday that it believes the countries have a significant potential concentration problem stemming from the application of the CQS 1 requirement and is of the opinion that the partial waiver is justified.

In Germany, BaFin’s general administrative order to partially wave the CQS 1 requirement came into effect on 1 January 2015. The Polish FSA will issue an administrative decision on the use of the waiver, which is to be published on the Polish FSA’s homepage, according to the EBA.