Covered bonds are set to face a risk weight disadvantage relative to the highest quality securitisations after a proposed CRR amendment to improve the treatment of European Covered Bonds (Premium) was dropped from the ECON Committee’s final position on an EU securitisation package.

The proposal to cut the risk weight under the Standardised Approach from 10% to 5% was aimed at defending covered bonds’ relative position vis-à-vis securitisations, some of which could achieve as low as 5% under the package of measures being negotiated, which includes revisions to legislation including the Capital Requirements Regulation (CRR) and Securitisation Regulation, among others, aimed at boosting the securitisation market.

However, the position adopted by the ECON Committee upon a vote on Tuesday omitted the proposed halving and any other changes to the treatment of covered bonds that would help maintain their relative position versus securitisations. This is set to be the Parliament’s position in the forthcoming trilogue with the European Commission and Council – neither of which have included such provisions for covered bonds in their positions – to arrive at the final texts.

By way of consolation and compromise, the Parliament’s text requires the Commission to conduct a specific review of the impact of the securitisation reforms on covered bonds five years after they come into effect, and consider whether any adjustment to covered bond risk weights is necessary. Meanwhile, the European Banking Authority is after two years also set to more broadly consider any effects on the covered bond market of the securitisation reforms as part of an overall review of the package.

The decision to omit the improved covered bond treatment from the position adopted by Parliament is understood to have reflected political considerations among the various voting blocs as much as the merits of the proposed amendments. The rapporteur in charge of the package, German MEP Ralf Seekatz of the European People’s Party (EPP), secured a majority in favour (33 to 25) with the support of the Renew and Socialists & Democrats groupings, rather than others further right of the EPP that may have supported the covered bond amendments.

Some market participants were downbeat about the outcome. Cas Monsema, senior financials analyst at Rabobank, said that while the door has been left open a little, the possibility of any lowering of risk weights and improved prudential treatment for covered bonds is now “quite the long shot”.

However, while the covered bond industry had been lobbying for the asset class’s risk weights to be commensurately improved with those of high quality securitisations, speakers at a European Covered Bond Council plenary in Stavanger last week were more ambivalent. ECBC secretary general Luca Bertalot highlighted the proposals for reviewing treatment, for example.

“We have gained a review clause,” he said on Wednesday, “with the European Parliament proposing that covered bond treatment should be properly assessed.

“Overall, it’s a good result and we remain well positioned from a political point of view.”

Other speakers expressed mixed views on the implications for covered bonds.

“In the marketplace, investors will always seek relative value, so the new regulatory treatment of securitisation will in my view have an effect,” said André Küüsvek, president and CEO of the Nordic Investment Bank. “So we should not ignore it.

“But all in all, I tend to think that even though there has now been this news on the regulation, any shift will still be gradual. As to NIB’s own investment portfolio, I think for us, we would still be more of a covered bond-minded investor.”

Friedrich (Fritz) Luithlen, global head of debt capital markets and syndication at DZ Bank, downplayed the impact – at the same time as acknowledging that bank treasuries would be well advised to look at adding securitisations to their portfolios.

“Just like the introduction of corporate credit in treasury books wasn’t a problem for the covered bond market, I don’t think it will have a significant impact, and certainly no cliff effect whatsoever,” he said, also highlighting how much liquidity banks currently have available to deploy.

Bertalot also noted that leaving covered bond treatment untouched obviates the need to reopen the covered bond dossier in Brussels, which chimes with both the Commission’s stance and the industry’s: the ECBC has formalised its response to the EBA report, telling the Commission that the directive should be left alone for now.

“We are convinced of the added value of the covered bond directive,” he said in Stavanger, “but we now need to secure stability and continuity for the market. There is really no need to reopen at this stage the Pandora’s Box of the directive.”

Photo: Luca Bertalot in Stavanger; Credit: EMF-ECBC