General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
November 26, 2018

European Parliament, or EP, published report on the proposal for a regulation of the European Parliament and of the Council regarding exposures in the form of covered bonds. The proposed regulation would amend the Capital Requirements Regulation (Regulation No 575/2013). The report was tabled for the first reading at the Plenary session. It includes draft of European Parliament legislative resolution, procedure of the committee responsible, and information on final vote by roll call in the committee responsible.

In light of the opinion of EBA, it is appropriate to amend CRR by adding additional requirements for covered bonds, thus strengthening the quality of covered bonds eligible for favorable capital treatment, as provided for in Article 129 of that Regulation. Article 129 of CRR grants, under certain conditions, preferential treatment to covered bonds. The report states that only a limited number of national covered bond frameworks allow the inclusion of residential or commercial mortgage-backed securities. The use of such structures is decreasing and is considered to add unnecessary complexity to the covered bond programs. It is thus appropriate to eliminate the use of such structures as eligible assets altogether. 

Moreover, Article 129(1) of CRR establishes the loan-to-value (LTV) limits for mortgage and ship assets but does not specify how those limits are to be applied, which may lead to uncertainty. The LTV limits should be applied as soft coverage limits, meaning that while there are no limits to the size of an underlying loan, such a loan can only act as collateral within the LTV limits imposed on the assets. It is appropriate to specify that the LTV limits determine the portion of the loan contributing to the coverage of the covered bond. To ensure greater clarity, the report states that it should also be specified that the LTV limits are applicable throughout the entire maturity of the loan. The actual LTV should not change but remain at the limit of 80% of the value of the property for residential loans and at the limit of 60% of the value of the property for commercial loans and ships.

To further enhance the quality of the covered bonds that receive the preferential capital treatment as provided for in Article 129 of CRR, that preferential treatment should be subject to a minimum level of overcollateralization, meaning a level of collateral exceeding the coverage requirements as referred to in Article 15 of the EU directive on the issue of covered bonds and covered bond public supervision. Member states can decide to apply a higher minimum level of overcollateralization to covered bonds issued by credit institutions located in their territory, without preventing other covered bonds with a lower minimum level of overcollateralization that comply with this Regulation from benefiting from its provisions. Such a requirement serves the purpose of mitigating the most relevant risks arising in case of the issuer’s insolvency or resolution. As per the report, CRR should be amended accordingly.

This report also states that the proposed regulation should be applied in conjunction with the EU Directive on the issue of covered bonds and covered bond public supervision and amending the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Bank Resolution and Recovery Directive or BRRD (2014/59/EU). To ensure the consistent application of the new framework establishing the structural features of the issue of covered bonds and the amended requirements for preferential treatment, the application of this proposed Regulation should be deferred to coincide with the date from which member states are to apply the provisions transposing that Directive.


Related Links

Keywords: Europe, EU, Banking, Securities, CRR, Covered Bonds, BRRD, UCITS, Report for Plenary, European Parliament

Related Insights

EBA Single Rulebook Q&A: Second Update for January 2019

EBA published answers to eight questions under the Single Rulebook question and answer (Q&A) updates for this week.

January 18, 2019 WebPage Regulatory News

BCBS Finds Liquidity Risk Management Principles Remain Fit for Purpose

BCBS completed a review of its 2008 Principles for sound liquidity risk management and supervision. The review confirmed that the principles remain fit for purpose.

January 17, 2019 WebPage Regulatory News

MAS Guidelines on Risk Mitigation Requirements for OTC Derivatives

MAS published guidelines on risk mitigation requirements for non-centrally cleared over-the-counter (OTC) derivatives contracts.

January 17, 2019 WebPage Regulatory News

HKMA Urges Local Banks to Start Working on FRTB Implementation

HKMA announced that it plans to issue a consultation paper on the new market risk standard in the second quarter of 2019.

January 17, 2019 WebPage Regulatory News

EBA Finalizes Guidelines for High-Risk Exposures Under CRR

EBA published the final guidelines on the specification of types of exposures to be associated with high risk under the Capital Requirements Regulation (CRR). The guidelines are intended to facilitate a higher degree of comparability in terms of the current practices in identifying high-risk exposures.

January 17, 2019 WebPage Regulatory News

BoE Publishes the Schedule for Statistical Reporting for 2019

BoE published the updated schedule for statistical reporting for 2019. The reporting institutions use the online statistical data application (OSCA) to submit statistical data to BoE.

January 16, 2019 WebPage Regulatory News

PRA Delays Final Direction on Reporting of Private Securitizations

PRA and FCA have delayed the issuance of final direction, including the final template, on reporting of private securitizations, from January 15, 2019 to the end of January 2019.

January 15, 2019 WebPage Regulatory News

SNB Updates Forms on Supervisory Reporting for Banks

SNB published Version 1.7 of reporting forms (AUR_U, AUR_UEA, AUR_UES, AURH_U, AUR_K, AUR_KEA, and AURH_K) and the related documentation for supervisory reporting on an individual and consolidated basis.

January 15, 2019 WebPage Regulatory News

BCBS Finalizes Market Risk Capital Framework and Work Program for 2019

BCBS published the final framework for market risk capital requirements and its work program for 2019. Also published was an explanatory note to provide a non-technical description of the overall market risk framework, the changes that have been incorporated into in this version of the framework and impact of the framework.

January 14, 2019 WebPage Regulatory News

EBA Single Rulebook Q&A: First Update for January 2019

EBA published answers to 13 questions under the Single Rulebook question and answer (Q&A) updates for this week.

January 11, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2480