A recommendation that covered bonds meeting certain criteria should be considered as Level 1 assets appears to have been agreed in EU trilogues, according to a CRD IV file seen by The CBR and sources familiar with the discussions, while MEPs have set a deadline for talks.

Courtyard of the European Parliament

The European Banking Authority (EBA), with other institutions, was charged with coming up with definitions of Level 1 and Level 2 LCR assets, with covered bonds at present placed in a Level 2 LCR bracket that comes with a 40% cap and a 15% haircut as per the Basel Committee on Banking Supervision’s Basel III framework.

However, according to a Council of the European Union Presidency addendum dated 13 February, the trilogue (discussions incorporating Council, European Commission and European Parliament representatives) on the CRD file has led to provisional agreement that “when making a uniform definition of liquid assets at least government bonds, and covered bonds traded on transparent markets with an ongoing turnover would be expected to be considered assets of extremely high liquidity and credit quality.”

CRD IV proposals differentiate between assets of “extremely high liquidity and credit quality” and “high liquidity and credit quality”, corresponding with Level 1 and Level 2 assets under the Basel III framework.

A source familiar with the recommendation cautioned against getting carried away by the significance of the apparent agreement, but said that it is a positive and helpful development.

Separately, Nykredit group CEO Peter Engberg Jensen, speaking at a company presentation yesterday (Wednesday), said “we are quite confident that they will be accepted” when discussing the possibility of Danish covered bonds being accepted as Level 1 assets.

The Covered Bond Report understands that the Presidency report on the latest outcome of the trilogue also proposes adding to the CRD IV file a list of disclosure-related criteria that covered bonds should meet in order to be eligible for preferential treatment under the capital requirements framework. These include that an investor receives information on aspects such as the value of the cover pool and the maturity structure of cover assets and covered bonds.

Should such changes make it into the final CRD IV framework they may augur well for a stronger role for the ECBC Covered Bond Label, which was launched to secure and improve the regulatory standing of covered bonds by setting disclosure and transparency standards for labelled covered bonds.

Meanwhile European Parliament representatives are seeking a rapid conclusion to CRD IV negotiations after apparently running out of patience with the Council. A joint statement by the Parliament’s negotiating team said yesterday that it has been disappointed at a lack of progress following a meeting on Tuesday, and said that unless a compromise is found by next Wednesday (27 February) they will ask the plenary of the Parliament to vote on its position.

The MEPs indicated that discussions they understood to have already been concluded – such as bankers’ pay – were reopened, and that agreement on some positions had not been reached among Council members. The statement was released by Othmar Karas, European Parliament Rapporteur on CRD IV/Basel III, and Shadow Rapporteurs Udo Bullmann, Sharon Bowles, Philippe Lamberts and Vicky Ford.