The ICMA Covered Bond Investor Council called for covered bonds to be recognised as Level 1 LCR assets today (Tuesday), saying that this treatment “is fully justified” in the context of technical findings, empirical evidence and regulatory aims.

Although not mentioning it, the investor council’s statement comes in the context of the news, first reported by The Covered Bond Report, that the European Banking Authority (EBA) is poised not to recommend that covered bonds count as “extremely” high quality liquid assets (HQLA) — CRD IV/CRR’s equivalent of Basel III’s Level 1 — when it reports to the European Commission (EC) by 31 December.

The investor body’s statement follows the European Covered Bond Council on 5 December reiterating its support for covered bonds’ inclusion as Level 1 assets, with market participants in several other countries also up in arms about the anticipated EBA move. (See here and here for previous coverage.)

A meeting of the EBA Board of Supervisors and Banking Stakeholder Group (BSG) was scheduled for last Wednesday (11 December), and a market participant said that a final EBA report is due before Christmas and is expected to confirm reporting of a non-Level 1 recommendation.

An EBA spokesperson told The CBR that the EBA will issue a report to the EC on uniform definitions of liquidity by 31 December and that “full details will be available upon publication”.

The ICMA Covered Bond Investor Council (CBIC) today cited three main reasons for its support of covered bonds’ claim to Level 1 status under the Liquidity Coverage Ratio (LCR): the performance of the covered bond market during the crisis; the results of an empirical study carried out by the EBA; and the contribution that covered bonds can make to reducing the interconnectedness between sovereigns and banks.

With respect to covered bonds’ performance during the financial crisis, the CBIC noted that they “offered banks a useful and reliable funding tool even in extremely difficult market conditions back in 2008”. It also cited a study showing that the liquidity of covered bonds declined less than that of government bonds during the crisis.

“This positive historical experience and real stress test results confirm the high liquidity status that should be assigned to covered bonds,” said the investor body.

Findings of an EBA empirical study presented at a London hearing in late October also show that covered bonds deserve to be ranked as top level HQLAs, according to the CBIC.

“The study … highlighted that there was only a very small quantitative difference in terms of liquidity between government bonds and covered bonds while the other asset classes considered showed a significant difference in terms of liquidity,” it said.

The treatment of covered bonds as Level 1 LCR assets is also consistent with the European regulators’ stated aim to wish to reduce the “interdependence of sovereign and bank creditworthiness”, according to the CBIC, as this would help diversify banks’ liquidity buffers away from government bonds.