July 24, 2018

EBA published a report presenting the outcome of its assessment to the EC’s call for advice on the European Secured Notes (ESNs). In addition, it puts forward recommendations on key aspects for EC to consider when possibly designing the legislative framework for small and medium-size enterprises (SME) European Secured Notes.

SME European Secured Notes, similar to covered bonds, could be structured as a dual recourse instrument. Due to the high-risk profile of SME exposures, EBA suggests a more restrictive framework, especially with respect to the coverage, the liquidity, and the disclosure requirements and suggests strict eligibility criteria at both loan and pool level and a minimum level of over-collateralization of at least 30%. In terms of capital requirement, it is advised that no preferential treatment (that is, similar to covered bonds) is granted. However, a differentiated risk-weight treatment compared to unsecured notes could be considered subject to certain considerations. 

 EBA does not recommend the creation of an infrastructure European Secured Notes. A dual recourse structure for Infrastructure loans is not appropriate given the lack of granularity in a cover pool, the complexity of the loan structures and the specific and different nature of infrastructure projects making it very difficult to create a high quality dynamic cover pool of infrastructure loans. EBA recommends EC to investigate the case for a new distinct asset class for high-quality project finance loans in the form of a standardized EU infrastructure bond. Further EBA work would be needed to specify the features and the applicable framework for this potential new product. This contribution will provide input into the EC's considerations on the further development of the Capital Markets Union project.

 

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Keywords: Europe, EU, Banking, Securities, European Secured Notes, Covered Bonds, EBA