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    EC Proposes to Amend Liquidity Coverage Rules for Covered Bond Issuers

    October 27, 2020

    EC published draft of a delegated regulation amending liquidity coverage rules for covered bond issuers. The draft regulation amends Regulation 2015/61 (the LCR Delegated Regulation) to supplement the Capital Requirements Regulation, or CRR, with regard to liquidity coverage requirement for credit institutions. This amendment to the LCR Delegated Regulation would also fix any ambiguous or outdated rules and clarify some of the existing rules that are unrelated to the Covered Bond Directive (CBD or Directive 2019/2162). The draft regulation is open for feedback until November 24, 2020 while the text of the proposed draft indicates that the amended regulation shall apply from July 08, 2022.

    The Delegated Regulation 2015/612 needs to be amended to better allow credit institutions issuing covered bonds to comply with the general liquidity coverage requirement for a 30-calendar-day stress period (in Article 4(1) of Regulation the LCR Delegated Regulation) and with the cover pool liquidity buffer requirement of holding liquid assets to cover net liquidity outflows over the next 180 days (in Article 16 of CBD). To clarify certain existing rules and to align the text of Delegated Regulation 2015/61 with the definitions laid down in CRR and CBD, certain additional changes have proven necessary. The general liquidity coverage requirement and the cover pool liquidity buffer requirement result in an obligation for credit institutions issuing covered bonds to hold a certain amount of liquid assets for the same period of 30 calendar days. However, credit institutions should not have an obligation to cover the same outflows with different liquid assets for the same period.

    To address this overlap, the encumbrance criterion under the general liquidity coverage requirement should be adapted to treat liquid assets held as part of the cover pool liquidity buffer as unencumbered up to the amount of net liquidity outflows stemming from the associated covered bond program. Moreover, it is necessary to lay down monetization rules for the assessment of liquid assets held in a cover pool liquidity buffer. Other proposed amendments to LCR Delegated Regulation include the following:

    • Replace references to "secured lending transactions" in Article 28(3) and in Article 32(3)(b) and (4) of the LCR Delegated Regulation with references to "securities financing transactions." This would better align the text with the LCR standard agreed at international level by BCBS.
    • Insert a reference to official export credit agencies in point (g) of Article 7(4) of the LCR Delegated Regulation to ensure equal treatment of securities issued by export credit agencies guaranteed by the central government of a member state, irrespective of the organizational structure of the respective export credit agencies. 
    • Amend the LCR Delegated Regulation to align it with Article 129 of CRR, as amended by Regulation 2019/2160 and CBD. 

     

    Related Link: Draft Delegated Regulation

    Comment Due Date: November 24, 2020

    Keywords: Europe, EU, Banking, CRR, Basel, Covered Bond Directive, Liquidity Risk, Covered Bond, LCR, EC

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