The EMF-ECBC initiative comes in the wake of the December launch of a European affordable housing plan by the European Commission, which was itself the culmination of a year of work, with the EMF-ECBC having earlier, in May 2025, published a concept note that its new strategy expands on.

Central to the industry body’s proposals is a 28th regime mortgage guarantee scheme, which would build on the experience of successful public-private national guarantee schemes in countries including France, Greece, Italy, the Netherlands and Romania. As a so-called 28th regime measure, it would complement rather than replace or subsume the national activities, and operate as a scaled-up pan-EU scheme.

“This strategic pathway sets out a vision for strengthening the competitiveness of the EU Single Market by advancing toward a more harmonised European mortgage framework,” said Luca Bertalot, EMF-ECBC secretary general (pictured), announcing the proposals on 27 March.

“At its core is the proposal for a European ‘28th regime’ mortgage guarantee – an initiative designed to improve access to homeownership, enhance financial stability and mobilise private capital, all while respecting the fiscal constraints faced by many Member States.”

As well as directly making mortgages more accessible and housing more affordable for citizens, such a guarantee scheme could promote energy efficiency measures, Bertalot told The CBR, with the Energy Efficient Mortgage Label the EMF-ECBC has promoted potentially being required for eligibility, for example.

The industry body said a scheme could be implemented through a dedicated fund established by the European Investment Bank (EIB) within the framework of the European Housing Platform, and provide a first demand guarantee on a portion of mortgage loans.

“For specific categories of borrowers, such as young people, low-income households, single parents or elderly borrowers, the level of the guarantee could be increased subject to clearly defined criteria and conditions applicable at EU level,” said the EMF-ECBC. “The guarantee would cover the bank’s credit risk and not the borrower’s repayment obligations.

“As a result, banks participating in the scheme would be able to lend with lower risk exposure, and reduce both capital requirements and execution risk.

Further measures in the EMF-ECBC’s package include interventions in the European implementation of Basel III, notably:

Making the transitional arrangements in Article 465(5) of the Capital Requirements Regulation (CRR) permanent at the current level of the Output Floor for residential mortgage exposures that meet the low-risk criteria;

Reassessing the necessity of introducing the Basel III prudent value (CRR property value) in Article 229 CRR as a new concept of value in the calculation of capital requirements, instead of the long-standing and well-established concepts of market value and mortgage lending value. The property value has not been adopted in other jurisdictions such as the UK and Switzerland, thereby exposing EU lenders to an uneven playing field in their lending business. [EMF-ECBC wording.]

The EMF-ECBC also said that a more harmonised European mortgage framework would improve the efficiency of capital markets funding, benefiting instruments such as covered bonds, securitisations and sustainable debt.

Bertalot said that such a European mortgage guarantee scheme and associated harmonisation and labelling could serve as an approach that could then be built on at a global level – an initiative it is working on with the International Secondary Mortgage Market Association (ISMMA).

Under EU moves to improve the securitisation market, the risk weight for the highest quality securitisations would fall to 5% on a comparable basis, thereby reversing the long-standing preferential treatment of covered bonds.

In two draft reports dated last Thursday (11 December), German MEP Ralf Seekatz (EPP) (pictured), Rapporteur for the European Parliament’s Economic & Monetary Affairs Committee (ECON), included amendments to commensurately improve covered bonds’ treatment – with the risk weight of covered bonds of credit quality step 1 cut from 10% to 5% – and to explain the rationale for doing so:

“To ensure coherence in the prudential framework following the recalibration of capital requirements for high quality securitisations, the treatment of covered bonds should be adjusted accordingly. Covered bonds exhibit a consistently robust risk profile due to their structural safeguards and regulatory framework. Maintaining an appropriate balance between the prudential treatment of covered bonds and securitisations is necessary to avoid unintended market distortions and to preserve the functioning of the covered bond market as a key source of stable funding.”

The move – which would involve modifying the Capital Requirements Regulation – has been welcomed by proponents of covered bonds, who had been pushing for such a response.

“We are very pleased,” Luca Bertalot, secretary general of the European Mortgage Federation-European Covered Bond Council (EMF-ECBC), told The CBR. “We are firm believers in the complementarity of the two instruments and support any initiative to reinforce and make the securitisation market a success in the Capital Markets Union.

“At the same time, we cannot risk any kind of arbitrage and it is very important to ensure that covered bonds retain their status as a very attractive instrument.”

However, such a lowering of risk weights would not simply maintain EU/EEA covered bonds’ position in credit markets, but give them a boost, according to market participants.

“It would make covered bonds meaningfully more attractive to the key bank treasury investor base,” said Cas Bonsema, senior financials analyst at Rabobank. “In our view, EEA covered bond spreads would tighten in across the board as capital requirements decrease.

“As a result, covered bond spreads would be expected to trade closer to those for government bonds (0% RW) and SSAs.”

The proposed lowering of risk weights could nevertheless amplify the differential between EU/EEA covered bonds and those from third countries, which would not see any improvement to their already higher risk weights – only emphasising the importance of EBA third country equivalence proposals.

The draft reports will be discussed within ECON before being finalised with possible further amendments, ahead of the EU trilogue process in the new year, so any finalisation of the securitisation package is not expected until towards the end of the first half.

The webinar on the credit and market implications of the European Banking Authority report was hosted by Andrew South, head of structured finance research – EMEA, S&P Global Ratings, on Wednesday.

Although participants paid tribute to the thoroughness of the EBA’s work, Bertalot (pictured), secretary general of the European Mortgage Federation-European Covered Bond Council, highlighted that the mood in Brussels has changed since the regulator’s work was first commissioned.

He said there is little evidence yet in the European Commission or the industry of any enthusiasm for taking up the majority of the EBA recommendations to amend the covered bond directive.

“If you are in the corridors of the Commission, the only word that you hear is ‘simplification’,” he said, “and my question is, what will be its appetite for reopening Pandora’s Box when the EBA is saying that covered bonds are extremely important for the union and are working very well, with a need of only minor improvement to this market?

“We are collecting feedback from them and a lot of critical points have already been raised,” he added. “As an industry, we will be making sure that the good covered bond directive will not be the subject of overengineering.”

Bertalot noted that the directive has a principles-based approach potentially offering flexibility to include other asset classes, something that the EBA recommendations to align the directive with the CRR requirements would contradict, and Patrick Seifert, global head of corporates and DCM, LBBW, echoed these sentiments.

“The marginal benefits to be expected from this versus the work you put into it would be very, very limited,” he said. “This market is rock solid, basically triple-A by nature in a world where there are only nine triple-A countries left.

“And in whatever fine-tuning is done, we certainly want to be mindful of what’s happening in other dimensions and the broader context – we need room for manoeuvre for the market to serve the multiple challenges we face going forward, such as defence, and deregulation in the US.”

Antonio Farina, sector lead, covered bonds, S&P, noted that while several aspects of the EBA’s recommendations are “mildly” credit positive – subject to how they might be fleshed out and implemented – they would not materially change the way the rating agency looks at covered bonds. For example, while a tightening up of liquidity safeguards in Sweden could decrease the required overcollateralisation for currently assigned ratings, the jurisdiction is already a triple-A market.

Olaf Pimper, portfolio manager, Commerzbank, said that while he has welcomed the benefits of the directive – notably the European Covered Bond (Premium) tag, which would become the only available designation under the EBA recommendations – the most important topic going forward is that of third country equivalence. He said this poses threats as well as opportunities, but that overall the ability to diversify portfolios would be most welcome.

“Right now, we have a lot of uncertainty in the market towards third country equivalence,” he said. “If you take it seriously, then we as an investor have to ourselves do an ISIN by ISIN assessment of each covered bond, and that poses a lot of challenges. If we would have a third country equivalence list, then that would definitely be a game-changer.

“Not so much when it comes to LCR treatment; what would be of utmost importance is the risk weight assigned to those third country covered bonds – it would be lowered, for those banks using the standardised approach, from 20% to 10%, and for those using any kind of internal ratings-based approach, the impact might be even greater, because we would then be able to use a loss given default of 11.25% as for EU covered bonds, instead of the 45% that we were recommended by the EBA to use right now.

“So if a country indeed got on the third country equivalence list, I am very, very positive that there would be increased demand, at least by bank accounts – although there’s also a risk that if a country does not get on that list, you would see far less demand for their bonds, because banks would probably not buy them anymore if they are not LCR-eligible.”

However, the speakers flagged that the road to third country equivalence is set to be a long one.

According to Maureen Schuller, head of financials sector strategy, ING, none of the six major non-EU/EEA markets with euro benchmark covered bonds outstanding – Australia, Canada, New Zealand, Singapore, South Korea and the UK – would even satisfy the EBA’s prerequisites for third country equivalence assessment. She cited shortcomings related to supervisory equivalence, domestic investor involvement, and central bank and regulatory treatment, among others as disqualifying the jurisdictions from third country equivalence.

“And this is just the prerequisites,” said Schuller, “not even moving on to the other requirements to be considered once the equivalence assessment can actually be started.”

Bertalot suggested that any Brussels process towards a third country equivalence regime could be a journey of three to five years, but he said this would give the market the opportunity to overcome some of the challenges cited by Schuller and ultimately arrive in a stronger position.

“So the ECBC is, firstly, discussing and analysing all the covered bond legislation around the globe to try to make sure that they are as aligned as possible to the directive,” said Bertalot. “Then we are focusing on making sure that the treatment of covered bonds is harmonised around the globe.

“We need to make sure that all our partner countries who would like to have third country equivalence should have recognition of covered bonds in the LCR and in the assets repo-eligible with their national central bank. So we have started lobbying with all the ministers of finance and central banks outside the EU to make sure that we have covered bonds in Level 2 of the LCR, but even in Level 1, where we have them in Europe.

“If we convince the other countries to put covered bonds in Level 1 and secure reciprocity,” he added, “we will build probably the largest investor base that we can have for one of the most important asset classes of the Union. And the housing agenda will benefit massively from having an active, robust and global covered bond market.”

A replay of the webinar can be found here.

Austria’s Bawag acquired Knab (formerly Aegon Bank) of the Netherlands in February of last year. Currently a subsidiary of Bawag, Knab is set to become a passported branch of Bawag in the Netherlands as it is fully incorporated into the Austrian’s corporate structure.

This entails Bawag becoming issuer of Knab’s Dutch covered bonds, and on 12 September it announced a consent solicitation to amend the trust deed of Knab’s soft bullet programme to allow the merger to proceed without requiring further bondholder consent. Bawag detailed its plans in an investor presentation accompanying the consent solicitation, for which Rabobank was sole solicitation agent.

At the same time, consent was sought to effectively convert and merge a €500m June 2027 conditional pass-through Knab covered bond into the soft bullet issuance (of which two €500m issues are outstanding), thereby taking care of all but one of Knab’s outstanding covered bonds – a second €500m CPT matures next month and hence will become a non-issue. The move to soft bullets-only reduces the cost complexity and complexity of maintaining an extra programme.

A consent fee of 0.125% was offered on both consent solicitations to noteholders submitting valid voting instructions in favour of the proposals before an early instruction deadline on 29 September. Quorums of 66.67% for the merger consent and 75% for the CPT switch were not met at initial meetings on 7 October.

However, at adjourned meetings last Tuesday – which had been provisionally scheduled from the outset of the exercise – 63.12% of eligible noteholders participated in the merger vote, with 100% of these in favour of the proposed amendments, with the CPT switch also approved with 54.88% participation and 97.49% in favour.

“The entire process was designed to maximise the chances of success already from the start and be as investor-friendly as possible,” said Sjors Hoppenbrouwers, director, securitisation and covered bonds, DCM, Rabobank. “This included offering an attractive consent fee, providing clarity on the regulatory status of the programme post-merger, and confirming the continued favourable regulatory treatment, including retention of the European Covered Bond Premium label.

“The strong voting outcomes reflect clear investor alignment with Bawag strategic objectives and confidence in the proposed structural changes and future set-up.”

The relevant supervisory authority for the covered bonds will switch from De Nederlandsche Bank to the Financial Market Authority Austria, but they will remain on the Dutch covered bond register as well as joining the Austrian register. And while becoming subject to the Austrian Pfandbrief Act, they will continue to contractually comply with the requirements for legal covered bonds as set out in the Dutch covered bond regulations, with the stricter provision from either regime taking precedence.

The Knab issuance will at the same time remain separate from Bawag Pfandbriefe – the SPV structure of the Dutch programme will remain unchanged and assets separate from Bawag’s cover pools.

“This deal sets a precedent for future pan-European bank M&A activity in relation to covered bond funding programmes, especially where it involves countries with different covered bond structures,” said Ruben van Leeuwen, head of DCM FI origination, Rabobank.

S&P affirmed that the covered bonds will retain their triple-A ratings post-merger upon announcement of the consent solicitation. Bawag is meanwhile committed to maintain the triple-A rating on a best-effort basis, and noted that in addition to the current cover pool, Knab’s soft bullet programme has access to an eligible back book of €1.75bn, “enabling ample collateral availability for asset replenishment going forward”.

The Austrian bank also said it “will source covered bond funding exclusively through its Austrian Pfandbrief programmes” – some 36% of Bawag’s mortgage Pfandbrief cover pool is already Dutch mortgages.

No non-UK benchmark covered bonds had been issued in the sterling market since the Prudential Regulation Authority (PRA) on 8 April made a surprise announcement that such securities would be excluded from banks’ LCRs, even though the process to do so was paused on 17 April in the face of a backlash against the move and the way it was handled.

The initiative was deemed particularly problematic given how it could also affect EU treatment of UK covered bonds, which is currently being considered by European authorities.

In coordinated announcements on Tuesday, the PRA and HM Treasury (HMT), as part of a broader policy update, unveiled a new plan to consult on and potentially introduce “an Overseas Prudential Requirements Regime (OPRR) that could be used to designate overseas jurisdictions in relation to the prudential treatment of UK firms’ exposure to non-UK covered bonds”, according to the PRA’s statement.

HMT will meanwhile ensure that any designation does not create cliff edges in treatment for overseas covered bonds issued prior to the legislation.

The news was greeted positively by market participants.

“We welcome the certainty this brings,” Ian Stewart, executive director, UK Regulated Covered Bond Council, told The CBR, “and the opportunity to participate in the consultation.”

And today Canadian Imperial Bank of Commerce (CIBC) tapped a £800m October 2029 floating rate covered bond for £200m (C$368m, €231m).

Wojtek Niebrzydowski, vice president, corporate treasury, CIBC, said the issuer had been considering such a tap for over a month and had considered it feasible ahead of last week’s UK announcement, but had been focused on other trades, including a US dollar AT1 and Australian dollar covered bond.

However, with these out the way, and renewed impetus behind the sterling market in the wake of the regulatory news, the issuer refocused on the sterling tap. According to Niebrzydowski, the tap was exclusively placed with UK investors, a combination of bank treasuries and real money accounts.

Bankers anticipate new benchmark issuance picking up later in August.

“We’ve had some conversations with investors, asking if they are cool to buy now, and there’s been a really positive reaction, because they feel like they’ve been given a lot of comfort,” said a DCM banker. “There are still some investors who will need to have internal discussions before they begin buying again, but we’ve already seen the secondary market pick up a bit, with the non-UK stuff trading.

“So it seems like we’re back to where we were in March, with the upside of an there being an equivalence regime that would improve the capital treatment at some point in the future.”

While non-UK covered bonds will now continue to be treated as Level 2A-eligible, market participants raised the possibility of their joining UK covered bonds in Level 1.

The timing of any such move is unclear, but should be soon enough that five and even three year paper issued now could benefit, particularly as plans are firmed up.

“There has been a widespread view that the EU will do its equivalence thing and then other countries could use that as a model for what they might do in their own jurisdiction,” said a banker. “But the EU could take four years or so, while there’s a chance the UK could get all this in place first – they mention 2027 as when Basel 3.1 is coming into play.”

HMT’s statement notes that, in parallel with the liquidity requirement developments, it is working on updating the capital framework for UK financial institutions, where non-UK covered bonds similarly face risk weight issues.

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.”

Speaking at the latest European Mortgage Federation-European Covered Bond Council (EMF-ECBC) plenary in Athens, Roberta De Filippis, team leader, securitisation and covered bonds at the European Banking Authority (EBA), shared insights into the covered bond recommendations it is due to make to the European Commission this summer.

She cited reciprocity as one of four dimensions of any future EU equivalence regime.

“This will be based on reciprocity in cooperation with the third country authority,” said De Filippis.

Expectations that this would be the case was a factor the alarm sparked by a surprise Prudential Regulation Authority (PRA) move earlier last month to generally exclude non-UK covered bonds from UK banks’ LCRs by publishing a “modification by consent”.

Although the regulator on 17 April paused the process “to consider and address the points raised appropriately”, an EU-based bank investor’s answer to a question from The CBR as to whether the episode could make him more cautious in buying UK covered bonds suggested damage has already been done.

“The short answer is, yes,” responded Christopher Bergmann, head of liquidity portfolio management, treasury, DZ Bank, saying UK issuers have to pay up to reflect the risk in them, including potential “countermeasures” from the EU.

The timing of the PRA’s move had been seen by UK issuers as “particularly unfortunate”, coming during the EBA’s work on equivalence, according to Michael McCormick, head of head of FIG DCM at BMO.

“The silver lining to the whole incident is that it has galvanised the market around the product,” he said. “The product is important and while there are lots of different regulations coming through, with respect to Basel and other things, there needs to be a continued dialogue with the regulator on this point.

“And clearly the PRA has taken note and taken that feedback on board, and decided to pause. Going forward, the challenge for the market is to continue to engage with what the EU is doing, potentially after the EBA comes out with their process.”

McCormick noted that, in line with the Basel framework, Canadian and other third countries’ liquidity and capital regulations for covered bonds do not include issuer jurisdiction as a criteria.

“What will help the market grow internationally,” he added, “is if we all take the success of the initiatives that have been done through the ECBC for the EU, and try to extend that to other jurisdictions so that we get the right results in other markets.”

EBA state of play

The level of maturity of the third country covered bond market would be taken into account in conjunction with reciprocity, noted De Filippis

Alongside reciprocity, three further “dimensions” relating to third country equivalence were cited by De Filippis.

“Second, the scope, which is clearly the Covered Bond Directive. Third, the process to be followed for this equivalence assessment. And fourth, which is currently the main area of focus of the discussion, the principles upon which we should assess equivalence.

“And on this, we support a principles-based approach in the spirit of the Covered Bond Directive, that is necessary to assess different markets.”

On the EBA’s other covered bond work, she said the key areas under discussion with regards to its review of directive implementation are extendible maturities and liquidity buffers, and the topic of cover assets including the use of derivatives.

Regarding European Secured Notes (ESNs), which have long been touted as a dual recourse instrument backed by SME loans, the EBA will not support an update of the conclusion of its previous report due to the lack of market developments.

“We think it’s important, especially in light of the fact that securitisation is maybe not suitable for financing this asset class, so we remain open and we stand ready to react in case of new market activities,” added De Filippis.

“And we will try to reflect this positive approach in the report.”

The EBA is due to deliver its recommendations – also regarding green covered bonds – to the Commission in June, although there could be a slight delay until later in the summer, according to De Filippis.

Various follow-up initiatives were included in the EU covered bond directive, with three to be completed by July 2024 – the development of a third country equivalence regime, a report on European Secured Notes (ESNs), and a study on extendible maturity structures – while a report on the overall implementation of the directive was anticipated by July 2025. EBA is expected to provide input to the Commission in each area.

Luca Bertalot, secretary general of the European Mortgage Federation-European Covered Bond Council (EMF-ECBC), told The CBR that he expects the EBA to receive an expanded mandate from the Commission, but with the deadline for the bulk of its work potentially pushed back from next year.

“My understanding is that the EBA will receive a cumulative mandate covering all the pending issues in the directive – ESNs, a study of the covered bond market, and global third party equivalence,” he said. “On top of this, they will be asked to undertake an analysis of the potential of the green covered bond market – although there has been no official word on any of this.

“They will probably be given a bit longer than what is written in the directive,” added Bertalot, “probably until 2025 rather than 2024.”

EBA has already, in November 2022, received a call for advice from the Commission on the definition and possible supporting tools for green loans and mortgages to retail and SME borrowers, as part of work on the EU sustainable finance framework, which also includes the EU Taxonomy Regulation and EU Green Bond Standards. This work includes a green loan definition based on the taxonomy, measures to encourage and facilitate the uptake of green loans, and the green loan origination process.

An EBA mandate on green covered bonds could complement this work and the ECBC has been such anticipating developments under its Covered Bond Label and Energy Efficient Mortgages Initiative (EEMI) work.

From next month, it will be mandatory for Labelled issuers self-certifying their covered bonds as ESG issuance (via a green leaf symbol) to complete a tab (F1) for green data in their harmonised transparency templates (HTTs) that has thus far been voluntary, following a decision in November 2022.

“So now you cannot have a green leaf without having full disclosure on the ESG section of the HTT,” said Bertalot.

“Since September, when this decision was proposed, we have moved from €50bn to €125bn of issuance having the green leaf,” he added, “which is a big jump for the market.”

At the September ECBC plenary in Vienna, Torsti “Toto” Silvonen, Deputy Director General Market Operations, at the European Central Bank (pictured), had called for greater disclosure around covered bonds and at the latest plenary in Helsinki on 19 April he said he was encouraged by the latest step, calling it “great news” on a way towards increased transparency.

Silvonen noted that the ECB has begun tilting reinvestments under the corporate sector purchase programme component CSPP of its asset purchase programme (APP) and said it started with corporate bonds partly because it has more comprehensive climate-related data available.

“But this is not enough,” he said, “as we need to consider our entire operational framework, which includes also other purchase programmes and various types of collateral we accept in our lending operations. And as a matter of fact, corporate bonds make up a very small share of mobilised collateral, only 2%-3%, whereas covered bonds and ABS each make up much more, and together almost 40% of mobilised collateral.

“Therefore, we need more data also on their climate-related risks.”

In March the European Supervisory Authorities (ESAs – EBA, EIOPA and ESMA) and the ECB published a joint statement on climate disclosures for structured finance products, saying that “consistent and harmonised” requirements are across securitisations and similar funding instruments, such as covered bonds, to ensure a level playing field. Proponents of covered bonds have already argued that pool level disclosures would be more appropriate for the instrument than securitisations’ loan level reporting.

“Our initial view is that having granular loan level reporting for covered bonds may not necessarily be the first and foremost important issue, given the revolving nature of covered bond loan pools versus instruments without revolving assets in the underlying pool, such as ABSs,” said Silvonen. “At this stage, issuers might benefit more from spending their time and resources on getting actual data on energy performance and understanding the risks of the mortgage pools, rather than setting up very granular reporting infrastructure.”

He said the Energy Performance of Buildings Directive (EPBD) should help banks source data, even if the ECB has issues with elements of the directive.

“The lack of actual data on the energy efficiency of buildings still constitutes the main obstacle for properly assessing climate related risks,” noted Silvonen, “as well as steering financing towards more energy efficient real estate. Closing these gaps is of the highest importance, because any type of disclosure is only as good as the underlying data.”

Banks should therefore seek comprehensive climate-related information when originating new loans, with the option of using proxies for the existing mortgage portfolio.

Silvonen highlighted another issue facing the market: whether disclosures should focus on the use of proceeds, or the climate risk profile of the underlying pool.

“In our view, these are complementary perspectives that are both important,” he said. “Identifying and labelling the green use of proceeds is important for steering funds towards green purposes and energy efficient buildings. And on the other hand, the climate risk profile of the underlying cover pools is important for risk management purposes, and extends not only to energy efficiency – which is relevant to transition risks – but also physical risk and mitigation. In contrast to the use of proceeds, this type of information is already required from banks in the scope of Pillar 3 ESG risk disclosures”

Silvonen concluded by repeating a call to arms.

“Climate change constitutes a unique opportunity for the covered bond industry to become a pioneer in financing the green transition and boosting the transparency of climate related risks,” he said, “and this will only grow in importance.”

The banking industry has been concerned about the impact of the Basel III output floor, which in its original form could contribute to an increase in capital requirements well above the 10% maximum increase deemed appropriate according to a G20 mandate, with banks using the internal ratings-based (IRB) approach potentially facing particularly sharp increases in risk weights for mortgages. EU implementation will come via changes to the Capital Requirements Directive and Regulation (Banking Package 2021).

In October 2021, the European Commission proposed transitional arrangements that would ease the impact of the output floor for residential mortgage lending during a phase-in period. On Tuesday, the European Council, after a year of negotiations, adopted a position that echoes the proposed transitional arrangements that would temporarily ease the impact of the output floor for residential mortgage lending.

The Council’s decision comes despite a joint intervention on Friday from José Manuel Campa, chair of the European Banking Authority (EBA), Luis de Guindos, vice-president of the European Central Bank, and Andrea Enria, chair of the supervisory board of the ECB, warning against deviations from the internationally-agreed Basel III rules.

The European Parliament’s Economic & Monetary Affairs Committee (ECON) is scheduled to vote on its position on 5 December, but the official timeline could slip – with the subsequent plenary parliamentary vote and trilogue process also delayed – due to the political uncertainties and distance between the relevant parties’ positions.

ECON rapporteur Jonás Fernández, a Spanish socialist MEP, has called for stricter Basel III alignment, pushing back against the Commission’s transitional arrangements and instead proposing that only residential mortgage lending that satisfies certain ESG criteria be eligible for the preferential treatment – for which one source suggested only 1% of mortgages would qualify.

But other ECON members, such as Austria’s Othmar Karas of the European People’s Party, have tabled amendments supporting the Commission’s proposals and furthermore making them permanent, as well as extending the less burdensome treatment to commercial mortgages.

The European Mortgage Federation-European Covered Bond Council (EMF-ECBC) last month highlighted its support for such amendments, again warning of the potential impact on the banking industry and the real economy of measures that do not reflect European specificities and differences in risk.

The industry body cited research by Copenhagen Economics that estimated an average increase of 18% in capital requirements among the EU’s larger banks, equivalent to some €22bn of additional capital needing to be held against EU mortgage portfolios according to the Banking Package proposals, or €39bn to restore capital ratios to pre-package levels. The authors noted that some banks will face a much more severe impact than the average, while markets set to be worst hit include Denmark, Germany and the Netherlands.

The EMF-ECBC also sees the increase in capital requirements and blunter risk calibration resulting from the current proposals as a potential threat to the European mortgage financing model, including covered bonds and the long term access to capital markets they provide.

The overall impact could ultimately be lower availability of mortgages, higher rates for borrowers, and more off-balance sheet lending from less-regulated entities.

Jens Tolckmitt, chief executive of the Association of German Pfandbrief Banks (vdp), said the industry believes the transitional arrangements proposed by the Commission should be made permanent and expanded.

“Because it’s not a transitional problem,” he said, “it’s a structural problem. If you have a low risk business like mortgage lending, it’s not a question of moving from today’s situation to a future situation and making that easier through a transitional arrangement; it’s simply justified to treat these loans preferentially because they have proven to be safe.”

He noted the additional safeguard that preferential treatment becomes unapplicable should loss rates for institutions rise.

“And we think that if commercial loans fulfil the same requirements, they should be treated equally to residential mortgage loans,” added Tolckmitt.

The proposed treatment of acquisition, development and construction (ADC) commercial real estate exposures has also been flagged: they face a risk weight of 150%, rather than the 100% for ADC residential real estate. Such lending is typical of that necessary to support the Commission’s Renovation Wave initiative, and market participants argue that it is just one example of how the burdens of the Banking Package run counter to the role the banking industry could be playing in helping achieve the EU’s broader goals – particularly against the worsened economic backdrop.

“On the one hand, the European Institutions are calling for greater banking sector support for the REPowerEU and Renovation Wave, especially for the younger generation and vulnerable borrowers, in retrofitting their homes,” said EMF-ECBC secretary general Luca Bertalot, “while on the other hand, the different legislative proposals on Basel III, Taxonomy and EPBD seem to be not yet providing a clear, consistent and systemic line of action for housing finance. The European institutions need to look at the upcoming legislation not in silos, but at the overarching impact it is having on the housing landscape.

“We have 2000 banks in Europe ready to step in and provide the private capital that is needed and are trying to provide strategic support with efforts such as the Energy Efficient Mortgages Initiative. We just need clear recognition of the importance of the housing sector ecosystem.”

Photo: ECON committee vote; Source: European Parliament; Copyright EU

The European Covered Bond Council meeting in Vienna was held the day after the ECB on Tuesday of last week (19 September) released details of how it plans to decarbonise its corporate bond holdings, by tilting reinvestments under the Corporate Sector Purchase Programme (CSPP) and Pandemic Emergency Purchase Programme (PEPP) towards issuers with a better performance vis-à-vis climate goals. The central bank will base this on issuer-specific climate scores factoring in past emissions, greenhouse gas targets, and climate disclosures (see chart at end of article).

The details deliver one part of plans to incorporate climate change considerations into the ECB’s monetary policy operations that it announced in July. Then, the ECB also said that in future it will also consider climate change risks in its collateral framework and require compliance with the Corporate Sustainability Reporting Directive (CSRD) where possible.

“A significant proportion of the assets that can be pledged as collateral in Eurosystem credit operations, such as asset-backed securities and covered bonds, do not fall under the CSRD,” it added. “To ensure a proper assessment of climate-related financial risks for those assets as well, the Eurosystem supports better and harmonised disclosures of climate-related data for them and, acting as a catalyst, engages closely with the relevant authorities to make this happen.”

Speaking on a regulatory panel at the plenary, Ad Visser, head of financial markets and collateral section, market operations analysis division, at the ECB, echoed comments from deputy director general – general market operations Torsti Silvonen at an ECBC dinner the previous evening in reiterating this stance, noting that it has 15 to 20 times more collateral in the form of covered bonds and ABS than corporate bonds.

“At the ECB, we find it important that we can also take measures and get a better insight into the climate change features of covered bonds,” said Visser, “and also ABS, two important categories of collateral that are being mobilised.

“We think it’s good to continue playing this kind of catalyst role,” he added, “which we can play both in our collateral framework and in our programmes. And we very much want to encourage the industry and also the authorities to work more on getting climate related disclosure organised.”

Morten Bækmand Nielsen, ECBC chair and Nykredit head of ALM and investor relations, acknowledged the ECB’s call – “We hear you loud and clear,” he said – and noted that in the just-approved 2023 version of the Covered Bond Label harmonised transparency template (HTT) the F1 tab for green data remains.

“So far, provision of that data is voluntary for the issuers,” said Nielsen. “But I would like to take this opportunity to call on all issuers to actually populate that data in your HTTs.

“It’s part of a very important agenda across the EU, the green transition, the energy situation. This is a place where we can contribute by providing good data for the stakeholders and making sure that everybody can see what it is you are financing.”

While welcoming Nielsen “encouraging” issuers thus and the ECBC’s overall work in providing transparency through the HTT and Label, Visser noted that only around 10% to 14% of issuers had filled in such optional data.

“The word ‘mandatory’, that could be even better,” he added. “It’s very important that these figures go up, and in any case, that they start collecting also these data sooner rather than later.”

The ECB sees three points as particularly important in respect of climate-related disclosure for covered bonds: that it is necessary for all covered bonds, not just green/sustainable covered bonds, in order to be able to identify their climate-related risks; that data collection at the time of origination is crucial and should start without delay for all new loans; and that harmonised and consistent reporting across asset classes and jurisdictions is key.

Visser acknowledged challenges with respect to data that issuers face and the burden of the various incoming sustainability regulations, also saying that he hopes he will not be “bashed” as he had sometimes previously been in respect of the ECB’s covered bond purchase programmes.

“Perhaps one topic is over, and a new one starts.”

Flexibility in green covered ‘wise’

The plenary also addressed how green covered bonds might be defined, with the question still open seven years after Berlin Hyp issued the first of its kind in 2015.

The European Banking Authority (EBA) touched on the issue in a report on sustainable securitisation published in March in relation to the EU Green Bond Standard (GBS) and other initiatives, with Roberta de Filippis, policy expert in EBA’s prudential regulation and supervisory policy department, noting that this was partly because of its relevance to covered bond structures using SPVs.

“As to my knowledge – and I also checked with my Commission colleagues – there was no reach-out of the covered bond community for what concerns green covered bonds,” she said, “and whether there are issues for green covered bonds of being part of this new EU Green Bond Standard, which is voluntary, but, of course, which can be perceived by the market as a gold standard for green bonds.

“So I would encourage the covered bond community to reach out in case you see some issues for covered bonds to be in the scope of this EU GBS, or in case you think that there is scope for having a dedicated framework for it.”

ECBC secretary general Luca Bertalot noted that a recently formed ESG taskforce, moderated by UK Regulated Covered Bond Council executive director Ian Stewart, had officially received its mandate the previous day. The industry body is also meeting with authorities including the ECB, the European Commission and IMF next week in Venice, where green covered bonds and other liabilities, as well as the Energy Efficient Mortgages Initiative (EEMI) will be discussed.

“The work that the authorities are doing, especially on sustainability, is extremely important,” said Bertalot. “They are designing the standards for the new world, the green world. So being part of this discussion for us is essential. And we believe that we are special, so we want to make it the right angle for covered bonds to be part of this story.

“We invite all the members to contact Ian and make sure your voice is heard,” he added, “because we know that you have different views. What does it mean, green covered bonds? It’s an open debate.”

In the majority of green and sustainable covered bonds, assets eligible as use of proceeds under their frameworks have been within cover pools, but a few have merely used covered bonds as a vehicle for their green or sustainable bonds with eligible assets being outside the cover pool. The latter have been the subject of criticism from some “purists”, although the Green Bond Principles and EBA have shown sympathy with the more flexible approach.

Noting that sustainable issuance has fallen as a share of overall euro benchmark issuance from around 14% in 2021 to 10% in 2022, despite it growing in other bank funding, ING head of financials sector strategy Maureen Schuller said that issuers striving to restrict eligible assets to those in cover pools means the range of potential assets is “slim”. And Stefano Patruno, head of European regulatory policies, Intesa Sanpaolo, and ECBC deputy chair, said that policymakers’ allowance for the more flexible approach thus far is “wise” for at least a transitional period, given a lack of assets.

“The important thing,” said Carmen Muñoz, head of resource development at Sustainable Fitch, “is that if you have a green bond framework, it spells out how you’re going to be using your proceeds, so you have a clear picture of where those funds are going and external parties can actually evaluate whether that is additive or not.”

Indeed, Carl Haarnack, senior portfolio manager, fixed income, at Actiam, said additionality is key.

“It’s one thing to set minimum rules for what is green and what’s not – that’s very important,” he said. “But on top of that, if we come into the office tomorrow and there are 10 different green bonds being issued, how do we go about picking the right one? For us, the right one is the one with the biggest ambition and the one that serves best to establish this energy transition.”

ECB climate scoring methodology for corporate bonds

Source: ECB

Photo: Nielsen, de Filippis and Visser with HSBC’s Frank Will on the plenary’s regulatory panel