Changing priorities in Brussels, with the omnibus simplification package, augur radical changes to the regulatory landscape, according to the ECBC’s Luca Bertalot, who said it is ready to support a new capital markets paradigm, and its members post EBA’s report.

The European Banking Authority (EBA) had flagged that there would be a delay beyond last month’s deadline for its covered bond recommendations to the European Commission, but they are now expected either towards the end of this month or after the summer break.

However, speaking at the Covered Bond Investor Conference in Frankfurt on Thursday, Bertalot, secretary general of the European Mortgage Federation-European Covered Bond Council (EMF-ECBC), highlighted that the world has moved on since the EBA’s work was commissioned.

“We have two different tracks,” said Bertalot, “the EBA still implementing what was decided in the previous mandate of the European Commission, and the big wind of change arriving in Brussels. Some of the mandates currently under preparation at EBA seem to be far away from the political tone of the discussions that I see in the corridors of Brussels.

“We should not read history with the glasses of six months ago.”

Feeling the full force of the new currents are ESG developments.

“The omnibus package we saw in February is just the beginning of something very powerful,” said Bertalot. “The structure of the Taxonomy is facing radical change – the overall rethinking could drive major changes in the direction of travel. Against this background, I would not be surprised if even conceptual certitude such as the 15% best in class [in relation to green buildings] could see a rethink.

“The ESG discussions we are seeing in some of the outstanding mandates can at times sound prehistoric,” he added. “In many countries outside the EU, you can’t even say the words ‘ESG’ or ‘climate change’ in official documents anymore.”

The ECBC and other industry bodies, such as the Association of German Pfandbrief Banks (vdp), are therefore lobbying to ensure that their members are not hit by the fallout from any loosening of ESG requirements.

“I don’t want to find my banks in a difficult reputational position where a supervisory authority will ask for plenty of reports and no one is providing data because all the SMEs are moving to reporting on a voluntary basis,” said Bertalot. “That is the worst case scenario for our banks, where they have a legal obligation, but they don’t have access to data.

“So we are intervening, trying to make sure that things are simplified appropriately. And before we make big changes to the HTT, for example, let’s wait until the political dust settles and we have a better understanding of the current situation.”

The ECBC is meanwhile aligning its efforts with Brussels’ new priorities.

“We are working on the agenda for Seville,” said Bertalot, “and we will focus on the contribution that covered bonds could provide in the current debate on housing and capital markets real estate, for sure, but also on public Pfandbriefe, on infrastructure, on defence – that is where the attention is and we have a lot to contribute.

“Our job at the ECBC is to try to give you a sense of what is going to happen in the medium to long term, and we prepare the industry to support and be ready for the change.”

After the EBA is before the EBA

The EBA report is understood to have been finalised and only awaiting final sign-off ahead of legal and language checks that would typically take two to three weeks.

With covered bonds competing for time and attention on the Commission’s agenda, the latter focus of the EBA has been focusing on ranking priorities and the elements of its recommendations in order of importance, according to Bertalot.

“A priority road map will help in guiding decisions focusing on essential areas to be tackled and then nice-to-have,” he said. “My understanding is that we will have, for sure, a proposal for third party equivalence.

“A lot of topics will be discussed in the paper,” added Bertalot. “Extendible maturities is a key topic and there appears to be general support for this. On ESNs, we will not have a big surprise – they will confirm what they already said.

“We expect a more conservative approach on the eligibility criteria for Article 6, but there is a willingness on the part of certain important countries in the covered bond space to accept this. And every country implemented the directive very conservatively, so it is not a big problem.”

Third party equivalence could see two levels, according to Bertalot.

“One will be more principles-based, which will be the part of equivalence of the covered bond directive. And then we will have a more detailed reciprocity part on the CRR – the CRR will allow, for example, non-Europeans to have also special capital requirements, in theory.”

A recent decision by the UK PRA and reactions to it brought the topic into focus (see earlier coverage), but Bertalot said other third countries can generally sleep easy.

However, the way forward may take into account the implications and complementarity of the Commission’s push on securitisation, he noted.

“The European Commission is very keen to give a capital markets package to stakeholders, seeing complementarity between securitisation and covered bonds. But so far, we don’t have a third party equivalence regime for securitisation. So will the Commission go for third party equivalence for covered bonds? This is a source of reflection for the industry.”

Any decision by the Commission to proceed with such a regime would then see responsibility passed back to the EBA to negotiate equivalence.

“I think they have two options,” said Bertalot. “Either they look for Basel compliance – and I will be going to Sydney, Auckland, Singapore and elsewhere to make sure that they guarantee the regulatory treatment of covered bonds.

“Or LCR eligibility. A lot of countries have completely ignored the eligibility of covered bonds in Level 2, so our job is to make sure that those markets are doing what they have not yet done.”

The ECBC is therefore trying to promote and prepare for reciprocity to avoid any market disruption.

“We have a window of two, three years,” said Bertalot, “so it’s important for the community to work together to ensure that everything will be aligned and then influence the debate of the EBA, making sure that they don’t go looking for the smallest details.

“A principles-based reciprocity should be guaranteed,” he added. “We would like to see covered bonds eligible in all those countries, too, also to enlarge the market for European issuers: if we buy their paper, we should make sure that we can sell our paper in their countries.”