European Commission vice president Valdis Dombrovskis indicated that the planned EU legislative framework for covered bonds will restrict eligible assets to only mortgages and public sector loans yesterday (Monday), ahead of the European Parliament voting through an own-initiative report today.

The question of which assets will be eligible as covered bonds under an anticipated Directive was left open by the European Banking Authority in key recommendations to the Commission in December, and has hence been a focus of ongoing industry discussions. Ship loans, for example, are eligible assets under legislation in Denmark and Germany, while some market participants have pushed for the creation of a dedicated legislative SME and infrastructure loan backed product – in line with an ECBC European Structured Notes (ESNs) proposal – and others have expressed concerns about a watering down of the covered bond brand.

The Commission on 8 June said that it will present proposals for an EU legislative framework in the first quarter of 2018 and would assess the case for ESNs with a view to reporting on this the following quarter.

Addressing a plenary session of the European Parliament, Dombrovskis yesterday expanded on the Commission’s plans in a debate preceding a vote today (Tuesday) based on the report “Towards a pan-European covered bonds framework”, which was approved by the Committee on Economic & Monetary Affairs (ECON) on 20 June.

“We note your interest in building on the success of EU covered bonds in areas where this label cannot be used at this stage,” he said. “I am referring to the so-called European Secured Notes. The Commission is currently assessing the case for developing this new product. We will decide on possible Commission initiatives on European Secured Notes, following the results of our assessment.

“However, in the first stage, we will concentrate our action on traditional instruments backed by mortgages or public sector loans.”

The Parliament’s report is largely aligned with the EBA’s and the Commission’s views in supporting a principles-based approach, although it has noted that harmonisation should be “limited”, while calling for a legal framework for ESNs to be included in any Directive.

A resolution supporting the report’s position was this morning approved by 543 votes to 99, with 56 abstentions.

“Covered bonds must remain safe,” said ECON rapporteur Bernd Lucke.