Explanatory Memorandum to COM(2018)93 - Amending Regulation (EU) No 575/2013 as regards exposures in the form of covered bonds - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2018)93 - Amending Regulation (EU) No 575/2013 as regards exposures in the form of covered bonds. |
|---|---|
| source | COM(2018)93  |
| date | 12-03-2018 |
1. CONTEXTOFTHEPROPOSAL
• Reasons for and objectives of the proposal
The Commission has today adopted a package of measures to deepen the Capital Markets Union together with the Communication "Completing Capital Markets Union by 2019 – time to accelerate delivery". The package includes this proposal, as well as a proposal for an enabling EU framework on covered bonds, a proposal to facilitate the cross-border distribution of investment funds, a proposal for an enabling framework on European crowdfunding service providers (ECSP) for business, as well as a proposal on the law applicable to the third-party effects of assignments of claims and a Communication on the applicable law to the proprietary effects of transactions in securities.
Covered bonds are debt obligations issued by credit institutions and secured against a ring-fenced pool of assets to which bondholders have direct recourse as preferred creditors. At the same time, bondholders remain entitled to claim against the issuing entity as ordinary creditors. This double claim against the cover pool and the issuer is referred to as the ‘dual recourse’ mechanism.
Covered bonds are issued by credit institutions and are as such an important and efficient source of funding for European banks. They facilitate the financing of mortgage and public sector loans, thereby supporting lending more broadly. A significant advantage of covered bonds compared with other kinds of bank funding sources such as asset-backed securities is the fact that banks retain the risk on their balance sheets and investors have claims directly with the bank. Therefore, covered bonds allow banks to lend not only more, but also more safely. Not least for that reason, covered bonds fared well during the financial crisis compared with other funding instruments. They proved to be a reliable and stable funding source for European banks at a time when other funding channels were drying up.
An enabling framework for covered bonds at EU level would enhance their use as a stable and cost-effective source of funding for credit institutions, especially where markets are less developed, in order to help finance the real economy in line with the objectives of the Capital Markets Union (CMU). The enabling framework would also provide investors with a wider and safer range of investment opportunities and would help preserve financial stability. Member States will have to transpose these rules, ensuring that national covered bond frameworks comply with the principles-based requirements set out in this proposal. All covered bonds across Europe will therefore have to respect the minimum harmonisation requirements as set out in this proposal.
The enabling framework for covered bonds is featured in the Commission Work Programme for 20181. In the letter of intent following up his latest State of the Union speech, the President of the European Commission confirmed that an enabling framework for covered bonds should be launched or completed by end-2018 to ensure a deeper and fairer internal market.2 The Commission confirmed this intention in the Mid-Term Review of the CMU Action Plan of June 20173.
COM(2017) 650.
European Commission (2017). "State of the Union 2017: Letter of intent to President Antonio Tajani
and to Prime Minister Jüri Ratas".
3
The development of covered bonds across the single market is uneven; they are very important in some Member States, less so in others. Furthermore, they are only partially addressed in Union law. While they benefit from preferential prudential and regulatory treatment in various respects in the light of the lower risks (e.g. banks investing in them do not have to set aside as much regulatory capital as when they invest in other assets), Union law does not comprehensively address what actually constitutes a covered bond. Rather, preferential treatments are granted to covered bonds as defined in Directive 2009/65/EC4. However, that definition was drafted with a specific purpose in mind – limiting what undertakings for collective investment in transferable securities (UCITS) could invest in – and is not fit for the broader policy objectives of the CMU.
A Union legislative framework on covered bonds should expand the capacity of credit institutions to provide financing to the real economy and contribute to the development of covered bonds across the Union, particularly in Member States where no market for them currently exists.
The framework would also increase cross-border flows of capital and investment. It would thus contribute to the CMU and in particular to the further leveraging of credit institutions’ capacity to support the wider economy. In particular, it would ensure that banks have a broad range of safe and efficient funding tools at their disposal.
The framework consists of a Directive and a Regulation – the two instruments should be seen as a single package.
This proposed Regulation will mainly amend Article 129 of Regulation (EU) No 575/2013 (Capital Requirements Regulation (CRR)). The amendments build on the current prudential treatment but add requirements on minimum overcollateralisation and substitution assets. They would strengthen the requirements for covered bonds being granted preferential capital treatment.
The proposed Directive will specify the core elements of covered bonds and provide a common definition as a consistent and sufficiently detailed point of reference for prudential regulation purposes, applicable across financial sectors. It will establish the structural features of the instrument, a covered bond specific public supervision, rules allowing use of the ‘European Covered Bonds’ label and competent authorities’ publication obligations in the field of covered bonds.
• Consistency with existing policy provisions in the policy area
The proposal is part of ongoing work to ensure that covered bonds are of sufficient quality to justify their continuing preferential treatment.
It builds on ongoing work by the European Banking Authority (EBA) to identify best practices as regards the issuance of covered bonds5. That work is a response to the European
coordination of laws, regulations and administrative provisions relating to undertakings for collective
investment in transferable securities (UCITS) (OJ L 302, 17.11.2009, p. 32).
Report on EU covered bond frameworks and capital treatment, EBA (2014);
Report on covered bonds — recommendations on harmonisation of covered bond frameworks in the
4
5
Systemic Risk Board (ESRB) recommendation that best practices be identified and monitored so as to ensure robust and consistent frameworks for covered bonds across the Union6.
The proposal amends existing legislation, as recommended by the EBA, and renders it fully consistent with policy provisions in the field of prudential requirements for institutions investing in covered bonds.
• Consistency with other Union policies
One of the Commission’s most important objectives is to stimulate investment and create jobs. The Commission has launched a number of initiatives to ensure that the financial system contributes fully in that respect. First among those is the CMU, which involves a series of initiatives to unlock funding for Europe’s growth. Covered bonds should be seen in the context of the CMU, as bank financing is currently by far the most important funding channel in Europe and one of the CMU actions is to leverage banking capacity further in support of the wider economy. Covered bonds represent an efficient and stable funding tool for European banks. A legislative framework to harmonise covered bonds should be seen in this broader policy context.
Another important Commission objective in the realm of financial markets is to ensure that capital requirements for banks reflect the risks attached to the assets in their balance sheets. Accordingly, the CRR requirements ensure that covered bonds granted the most preferential treatment have a uniformly high level of investor protection. However, because Union law does not comprehensively address what actually constitutes a covered bond (see above), harmonisation is needed to ensure that covered bonds have similar structural characteristics across the Union that make them coherent with the relevant prudential requirements. The harmonisation of covered bonds is therefore in line with the Commission’s aim of financial stability, as pursued in its regulation of financial markets.
2. LEGALBASIS, SUBSIDIARITYAND PROPORTIONALITY
• Legal basis
The proposed amendment is based on Article 114 of the Treaty on the Functioning of the European Union, i.e. the same legal basis as the act that is being amended.
• Subsidiarity (for non-exclusive competence)
As Union legislation grants preferential capital treatment to covered bonds, the related requirements have to be amended at Union level. Furthermore, it is considered necessary to handle the requirements for preferential capital treatment at Union level to ensure a consistent degree of investor protection and a level playing-field for European credit institutions.
• Proportionality
The proposal strikes a balance between ensuring a sufficiently robust framework for covered bonds granted preferential treatment and avoiding a disproportionate increase in the cost of issuance. In seeking the right balance, the Commission considered all the associated costs and potential benefits (see accompanying impact assessment). The proposal builds on the recommendations from the EBA 2016 Report, but allows for some limited deviations (i.e. some provisions are less detailed than foreseen in the EBA report). This is to leave more room
Recommendation of 20 December 2012 on the funding of credit institutions, European Systemic Risk
6
for protecting the existing well-functioning national systems as strongly suggested by the stakeholders during the consultations and reinforces the proportionality of the proposal. The deviations do not involve the core structural features of covered bonds and their supervision.
The proposal includes provisions on the grandfathering of existing covered bonds in order to smooth costs for their issuers and for markets. As the impact assessment shows, expected costs can be deemed proportionate in relation to expected benefits.
Choice
of the instrument
A regulation is the appropriate instrument, as the provisions replace those in Regulation (EU) No 575/2013 concerning covered bonds’ eligibility for preferential capital treatment. This achieves the same direct legal effect as the current Regulation, ensuring that the objectives of the proposal are achieved consistently across the Union and contributing to greater certainty and a level playing-field for issuers and investors.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER
Contents
- consultations
- Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the
- iii) two meetings of the Expert Group on Banking, Payments and Insurance (EGBPI) and
- 9 10
- 11 12
- Recommendation of 20 December 2012 on funding of credit institutions, European Systemic Risk
- The impact assessment has been amended accordingly, also addressing additional suggest ions
- iii) a more thorough analysis of the impact of regulatory harmonisation on cross-border
- literature; and
- 13 14
- Implementing this option would stimulate the development of covered bond markets where
ANDIMPACTASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
This initiative on covered bonds relates to an area, which is very largely not addressed by Union legislation currently.
• Stakeholder consultations
The Commission consulted stakeholders at several points in the preparation of this proposal, in particular by means of:
i) an open public consultation on covered bonds (September 2015 to 6 January 2016);
ii) publication of an inception impact assessment (9 June 2017);
one meeting of the Financial Services Committee (FSC).
Under the CMU action plan, the purpose of the public consultation was to evaluate weaknesses and vulnerabilities in national covered bond markets and to assess the merits of a European framework. While respondents were concerned that harmonisation based on a ‘one size fits all’ approach could impair well-functioning markets and reduce flexibility and the range of products on offer, they also expressed cautious support for targeted EU action, provided that harmonisation is principles-based, builds on existing frameworks and takes account of the specificities of national markets. The results of the consultation were discussed at a public hearing on 1 February 20167.
The Commission received four responses on the inception impact assessment, all of which supported the EU legislative initiative. The respondents addressed specific aspects of national frameworks (e.g. liquidity) and confirmed the general view in favour of harmonisation while not jeopardising well-functioning national systems.
At the first EGBPI meeting (9 June 2017), the majority of Member States expressed support for a Union covered bond framework based on the EBA’s 2016 advice, provided it remains principles-based. At the second meeting (28 September 2017), the discussion was more
The results of the public consultation can be found here:
detailed, but in general Member States still supported a principles-based approach. Member States expressed similar views at the FSC meeting in July 2017.
The proposal also builds on further meetings with stakeholders and EU institutions. In general (while tending to focus on the aspect most relevant for their situation), stakeholders concentrated on balancing the need to change the existing framework so as to address prudential concerns with the wish to avoid disrupting well-functioning national systems. Input focusing on prudential concerns relating to the preferential treatment of covered bonds came mainly from the ESRB, the EBA and the European Central Bank, and to some extent from the competent authorities in the Member States with well-developed covered bond markets and from rating agencies, while the focus on well-functioning national markets came mainly from Member States with well-developed covered bond markets, from issuers and from investors.
The European Parliament has also expressed support for action, calling for a European legislative framework on covered bonds8.
Collection
and use of expertise
On 1 July 2014, the EBA issued a report identifying best practices with a view to ensuring robust and consistent frameworks for covered bonds across the Union9. The report was in response to a December 2012 ESRB recommendation on the funding of credit institutions10. It also set out the EBA’s opinion on the adequacy of the current prudential treatment of covered bonds, following the Commission’s call for advice in December 2013 on the basis of Article 503 CRR11.
As a follow-up, the ESRB recommended that the EBA monitor the functioning of the covered bonds market by reference to the best practices it had identified and called on the EBA to recommend further action if necessary.
In response, the EBA issued a Report on covered bonds — recommendations on the harmonisation of covered bond frameworks in the EU in December 2016. This includes a comprehensive analysis of regulatory developments in covered bond frameworks in individual Member States, with a particular focus on the level of alignment with the best practices identified in the previous report. Building on the results of the analysis, the EBA called for legislative action to harmonise covered bonds at Union level.
This proposal builds on the EBA’s analysis and advice. It deviates only in minor areas, e.g. as regards the level of detail concerning derivatives belonging to the cover pool; in the cover pool monitor not being mandatory; and, in the level of overcollateralisation.
In August 2016, the Commission had commissioned a study from ICF12 to assess the performance of current covered bond markets and the costs and benefits of potential EU action. The study, which was published in May 2017, looked at the potential benefits and costs of the EBA’s recommendations. Overall, it concluded that the potential benefits of a
Resolution of 4 July 2017 on the report Towards a pan-European covered bonds framework
(2017/2005(INI)).
Report on EU covered bond frameworks and capital treatment, EBA (2014).
Board (ESRB/2012/2) (2013/C 119/01).
Call to EBA for advice on covered bonds capital requirements, ref. Ares(2013) 3780921 (20.12.2013).
Covered bonds in the European Union: harmonisation of legal frameworks and market behaviours, ICF
8
legislative initiative outweighed the potential costs and there was therefore a case for legislative action.
In December 2017, the Basel Committee on Banking Supervision (BCBS) finalised the outstanding post-crisis regulatory reforms of the Basel III international regulatory framework for banks13. As part of the reforms, the BCBS revised the standardised approach on credit risk by including, inter alia, new standards on exposures to covered bonds. For the first time, the new standards largely replicate at international level the EU’s approach in the CRR, allowing covered bond exposures to benefit from lower risk weights subject to certain conditions. It is thus recognised that the EU’s treatment of covered bonds is prudentially viable and justified by the underlying characteristics of the instrument.
Impact
assessment
This proposal is accompanied by an impact assessment, which was submitted to the Regulatory Scrutiny Board (RSB) on 6 October 2017 and approved on 17 Nove m ber 2017 14.
The RSB commended the comprehensive and well-structured nature of the impact assessment and acknowledged that it applies its intervention logic systematically and contains a high degree of quantification to substantiate its findings. The RSB recommended that the report be improved in some limited respects:
a) the reasons for considering a ‘29th regime’ unattractive; and
b) greater clarity on the main elements of the ‘minimum harmonisation’ approach, and
whether (and how) they deviate from the EBA advice (Annex 6 has been added for this purpose).
of the RSB:
i) a more detailed explanation concerning the European secured note (ESN);
ii) a more detailed reasoning of the advantages of issuing covered bonds;
trade (issuance, investing) in covered bonds;
iv) a discarded option restricted to adjusting the prudential treatment of covered bonds;
v) a more comprehensive explanation of the ‘pass-through effect’ assessed in financial
vi) a table showing the links between monitoring activity and the benchmark benefits.
The Commission considered a number of policy options for developing covered bond markets and addressing prudential concerns. These differ in terms of the degree of harmonisation, ranging from a non-regulatory option to options involving full harmonisation, as follows
• Baseline: Do nothing;
• option 1: Non-regulatory option;
• option 2: Minimum harmonisation based on national regimes;
• option 3: Full harmonisation replacing national regimes; and
Basel III: finalising post-crisis reforms, Basel Committee on Banking Supervision (7.12.2017).
• option 4: ‘29th regime’ operating in parallel with national regimes.
Option 1 (non-regulatory) was considered ineffective in achieving the objectives, as there is no guarantee that Member States would follow the best practices. Option 3 (full harm onisation) would probably achieve the objectives, but could disrupt existing well-functioning markets. Option 4 (29th regime meaning a fully integrated regime for issuers on a voluntary basis as an alternative to national laws on covered bonds, not requiring amendments to existing national laws) depends on industry take-up to be effective. Consultations suggest that such take-up is unlikely; this would undermine the chances of achieving the stated objectives. Also, a parallel regime would contribute to further fragmentation and duplication of costs.
The retained option is option 2 (minimum har monisation based on national regimes). The retained option achieves most of the objectives of the initiative at reasonable cost. It also
balances the flexibility necessary to accommodate Member States’ specificities with the
uniformity necessary for coherence at Union level. It is likely to be the most effective in achieving the objectives, while at the same time being efficient and minimising disruption and transition costs. It is also one of the more ambitious options in regulatory terms, while enjoying the most support from sta keholders.
they do not exist or are underdeveloped. It would also lower issuers’ funding costs, help to
diversify the investor base, facilitate cross-border investments and attract non-EU investors. Overall, it would reduce borrowing costs.
The option would address prudential concerns, including in relation to market innovation, and secure the prudential benefit of aligning the structural characteristics of the product with preferential prudential treatment at Union level. It would strengthen the protection of investors and its credit-enhancing features would reduce their due diligence costs.
One-off and recurrent direct administrative costs under the preferred option are expected to increase for issuers in low-cost jurisdictions (see impact assessment). Costs would also increase for supervisors. At the same time, issuers would benefit from lower funding costs and in turn citizens would enjoy lower borrowing costs. Costs would not increase for investors, given the lower due diligence costs.
• Regulatory fitness and simplification
The package on covered bonds, in particular the Directive accompanying this proposal, aims at harmonising an area currently regulated mainly at national level. The minimum harm onisation in the Directive will bring simplification in terms of basic alignment of core elements of national regimes.
Fundamental rights
The EU is committed to high standards of protection of fundamental rights. In this context, the proposal is not likely to have a direct impact on those rights, as listed in the Charter of Fundamental Rights of the European Union.
4. BUDGETARY IMPLICATIONS
The proposal will have no im pli catio ns for the Union budget.
5. OTHERELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The accompanying proposal for a new Directive for covered bonds includes a general plan for monitoring developments in covered bond markets, requiring the Commission to carry out an evaluation of the Directive in close cooperation with the EBA and at least five years after the transposition deadline, and to report to the European Parliament, the Council and the European Economic and Social Committee on its main findings.
The evaluation is to be conducted in line with the Commission’s Better Regulation Guidelines. The report is to also cover the issuance of covered bonds in compliance with Article 129 CRR, developments as regards assets collateralising the issuances, and the level of over-collateralisation.
No specific implementation plans or monitoring, evaluation and reporting arrangements are intended for this proposal.
• Detailed explanation of the specific provisions of the proposal
Amending Article 129 of Regulation (EU) No 575/2013
Article 129 is amended in order to introduce new requirements on minimum overcollateralisation and substitution assets. Previous provisions governing transparency are moved to the part of the new Directive defining the structural features of covered bonds.
Article 129(1)(d)(ii) and (f)(ii) allows covered bonds to be collateralised by senior units issued by French Fonds Communs de Titrisation or equivalent entities governed by the laws of a Member State that securitise residential or commercial property exposures under certain conditions, including the provision that such units do not exceed 10 % of the nominal amount of the outstanding issue. This possibility is repealed, as only a few 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 programme.
Other provisions of Article 129 are maintained.
Overcollateralisation
The proposed amendments introduce a new requirement on a minimum level of overcollateralisation (a level of collateral exceeding the coverage requirements). This level is set at 2 and 5%, depending on the assets in the cover pool, based on a nominal calculation method. This level is in line with the advice of the EBA and with the results of the ICF study. While lower than the new Basel standards, it would make the product safer and would raise the level for the majority of Member States where the required minimum level is currently lower.
Repeal of Article 496 of Regulation (EU) No 575/2013
Article 496 allows competent authorities to waive the 10 % threshold referred to in Article 129(1)(d)(ii) and (f)(ii) for certain covered bonds.
As Article 129(1)(d)(ii) and (f)(ii) is repealed the possibility to derogate from the threshold is unnecessary. Article 496 is therefore repealed.