Two Green MEPs have tabled an amendment to CRD IV that would require deposit taking institutions to hold a capital cushion against issuance of covered bonds above a threshold of 4% of total assets, with a UK MEP having called for a report into whether a limit is needed.

More than 1,900 amendments to the latest version of the Capital Requirements Directive have were tabled by Members of the European Parliament’s Economic & Monetary Affairs Committee (ECON), and Wolfgang Kälberer, head of EU affairs at the Association of German Pfandbrief Banks (vdp), flagged the Greens’ proposals at a European Covered Bond Council plenary meeting in London yesterday (Thursday).

Philippe Lamberts (left) and Sven Giegold

Philippe Lamberts and Sven Giegold, MEPs for The Greens/European Free Alliance from Belgium and Germany, respectively, tabled amendments including two that, taken together, seek to disincentivise banks from using their best assets to back covered bonds while letting depositors fall back on deposit guarantee schemes, according to the politicians.

Their amendment 224 would insert into the proposed regulation text including the following:

“In order to avoid such actions, it is necessary to include a structure in the framework of CRD IV, which creates a disincentive for high issuance of covered bonds, specifically for institutions, which also take deposits. Therefore, financial institutions covered by this regulation and which also issue covered bonds and take in deposits should create an internal deposit reserve. This capital cushion must adequately reflect the ratio of covered bonds issued by a financial institution, which exceeds the threshold established through Article 124(5a) of this Regulation.”

Article 124(5a), another of their amendments, reads:

“Issuances of covered bonds, which exceed 4% of total assets of a credit institution, also taking deposits, are subject to a financial transfer to an internal deposit reserve.”

Although countries around the world have introduced or proposed explicit limits on covered bond issuance ranging from 2% to 20% (although based on slightly different measures) over the past decade, no European Union country has a limit of the magnitude envisaged by the Green MEPs and in most jurisdictions no hard limits have been proposed.

As reported by The CBR here, UK Conservative MEP Vicky Ford has also tabled several amendments placing greater demands on covered bonds. One of these (Amendment 1610) cites a “total unencumbered asset ratio” and would require the European Commission, after consultation with the European Banking Authority, to report on the amount and composition of financial institutions’ unencumbered assets.

It goes on to say:

“The Report shall in particular take into account the impact of increasing issuance of covered bonds by credit institutions in the Union on the amount and quality of assets available to repay unsecured creditors in the event of a winding up of credit institution. On the basis of [this] review…, the Commission shall report to the European Parliament and the Council on whether and how it would be appropriate to ensure that a limitation is placed on the level of assets held by an institution which are encumbered by security interests in respect of obligations owed to third parties as a proportion of the institution’s total assets, including as a result of lending between institutions, and if appropriate, submit a legislative proposal.”

Ford is a member of the European Conservatives & Reformists grouping in the European Parliament, which has 52 MEPs. The Greens-European Free Alliance is the fourth largest grouping, with 58 MEPs.

“We must pay attention as not to face a sudden regulation on this through the backdoor without having sufficiently assessed asset encumbrance as a whole and having analysed all potential systemic impact on funding, banking structures and business models,” said Kälberer at the vdp. “The potential for collateral damage of any ‘ad hoc’ rules in this area is significant.”

The Danish Presidency of the Council of the EU is aiming to finalise a compromise text on CRD IV by the end of June, which Katalin Dobranszky-Bartus, European Mortgage Federation senior economic adviser, said in the EMF’s latest Mortgage Info publication has resulted in intense activity at Council level.

“While the debate resolves around relatively technical regulatory issues, discussions in the European Parliament and Council are highly politically charged,” she said, “and considering the inevitable political trade-offs that we will see in the coming weeks, no-one can predict the final outcome.”