EBA recommends a harmonised EU-wide framework for covered bonds

The European Banking Authority (EBA) published today a Report including recommendations on how to harmonise covered bond framework in the EU. This Report represents an unparalleled attempt to further strengthen the covered bonds across the EU and seeks to ensure that only those financial instruments that comply with the harmonised structural, credit risk and prudential standards can be branded as ‘covered bonds’ and have access to special regulatory and capital treatment as provided in the current EU financial regulation.

The report presents an in-depth regulatory and market analysis undertaken by the EBA as a follow up to the recommendation issued by the European Systemic Risk Board (ESRB). As part of the analysis, the EBA observed that covered bond instruments with different quality characteristics across the EU are subject to the same European regulatory rules and benefit from a favorable regulatory recognition.

Building on the results of the extensive study, and at the same time recognising the specificities and strengths of national frameworks, the EBA proposed a fully-fledged framework based on ‘three step approach’ to harmonise the covered bonds in the EU.

First, a new covered bond directive should be developed to provide a definition of the covered bond and specify structural quality requirements for all regulated covered bonds in the EU. Second, the Capital Requirements Regulation (CRR) should be amended to strengthen conditions for those covered bonds that seek preferential capital treatment. Third, convergence of national frameworks should be encouraged on a voluntary basis in some specific cases by means of non-binding instruments.

This contribution will provide input into the European Commission’s considerations on the further development of the Capital Markets Union project.

Legal basis

The report follows up on the previous EBA report on covered bonds published in July 2014, which identified a series of best practices with a view to ensuring robust and consistent covered bond frameworks in the EU.

The present report has been developed in line with the ESRB Recommendation on funding of credit institutions , which requested the EBA to assess the functioning of the covered bond frameworks under the EBA best practice principles from 2014, and recommend further action.

The EBA statement and related information can be found here.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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