The European Council and Parliament reached a provisional agreement on the covered bond harmonisation package yesterday (Wednesday), paving the way for timely finalisation of the project after late compromises on areas such as Article 6, CQS3 and labels in the Directive and Regulation texts.

Commission vice president Valdis Dombrovskis, responsible for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union (CMU), said the agreement is an important step towards the development of the CMU.

“The CMU aims to mobilise and channel capital to all EU businesses that need resources to expand and thrive,” said Dombrovskis (pictured, second from left). “We want to make it easier and cheaper for banks to finance companies and households.

“By agreeing on the proposal today, the European Union is delivering on its commitment to put in place the building blocks of the CMU.”

The agreement was reached under the EU presidency of Romania, which could see its first covered bond issuance this year.

“Covered bonds are an important funding tool in some member states, but they remain under-used in others,” said Eugen Teodorovici, minister for finance of Romania.

Luca Bertalot, secretary general of the European Mortgage Federation-European Covered Bond Council (EMF-ECBC), welcomed the agreement.

“This agreement is a strong message that covered bonds are an essential part of the CMU framework and the role of the industry and asset class in the European economy, with the Commission and Parliament prioritising the finalisation of this package,” he told The CBR. “It is also a testament to the cooperative efforts of the industry in working together to secure the quality of this European product.”

He noted that the agreement achieves the widely-acknowledged challenge of balancing not disrupting existing well-functioning national markets with the need for a quality perimeter for covered bonds.

This challenge was only overcome in two key areas very late in the Trilogue process with pressure from senior Commission representatives, according to a participant in the discussions.

One was the extent to which exposures to derivatives counterparties of Credit Quality Step 3 (CQS3) can be included in cover pools. The Council had proposed a level of 10% whereas a 5% level had been proposed by Parliament, following the lead of ECON rapporteur and European Conservatives & Reformists MEP Bernd Lucke (pictured left), although other MEPs had advocated a higher level, with Italian issuers potentially disadvantaged by such restrictions. During the negotiations Lucke proposed that a higher level be compensated for by additional overcollateralisation requirements, but ultimately a compromise level of 8% was reached, with a review clause regarding the risks and benefits of such exposures included.

A compromise on Article 6 was meanwhile arrived at that accommodates Luxembourg concerns, while balancing the more flexible compromises was the inclusion of paragraphs regarding sanctions.

Lucke’s proposal that two labels be designated for covered bonds – one for those that meet CRR requirements, and one for those that do not but satisfy the Directive – was adopted, although whether or not these will be called “Premium” and “Ordinary”, respectively, has not been finalised.

“We are ensuring that a proven product continues to meet very high standards,” said Lucke. “Everyone benefits from this in the end.”

A representative of the Progressive Alliance of Socialists & Democrats (S&D) said that the agreement was in line with the principles-based approach they had advocated, building on best practices but without disrupting well-functioning systems.

He also welcomed the requirement that the Commission move on European Secured Notes (ESNs) as a priority in the next legislative mandate, as did Bertalot at the EMF-ECBC.

However, another party to the negotiations said that the disagreements on the technical details of the package resulted in a lengthy Trilogue – he noted that four rounds of discussions was high for a relatively narrow package – that ended up being something of a “damage limitation” exercise, whereas the Directive could have met “higher ambitions”, for example in complementing the Commission’s sustainable finance agenda.

He nevertheless said that the outcome had allowed the Juncker Commission to notch up a rare success in its CMU project, and it was positive that the package was nearing completion given the time pressures it faces.

Technical work on translating the political agreement into final texts will happen in the coming days, ahead of approval by Council working parties and ECON. The final proposed text is then set to be voted on by either a Parliament plenary in the week of 25 March, a mini-plenary on 4 April, or the last plenary of the current Parliament in the week of 15 April.

With the Commission having adopted a principles-based approach, Member States will have leeway to interpret the wording of the final texts, and Bertalot said the ECBC is ready to help coordinate national implementation to maintain harmonisation.

He noted that the European Commission will also be present at ECBC events in Singapore next month to present the package to a global audience.

“This can be a benchmark for other countries,” said Bertalot. “We really hope that they follow the example of the European legislative framework to implement covered bonds as soon as possible.”

Photo: Lucke, Dombrovskis and others yesterday after the conclusion of negotiations. Credit: Bernd Lucke/Twitter