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Capital markets union: political agreement reached on EU framework for covered bonds


 

The EU is supporting lending by providing easier access to mortgage and public sector loans.

The Romanian Presidency and the European Parliament today reached a provisional agreement on a harmonised framework for covered bonds. This framework will specify a common definition to receive an EU covered bond label and benefit from preferential capital treatment. The deal will now be submitted for endorsement by EU ambassadors.

Covered bonds are financial instruments backed by a separate pool of assets - typically mortgages or public debt - to which investors have a preferential claim in case of failure of the issuer. Covered bonds are an efficient source of financing of the economy which ensure a high level of certainty for investors.

Covered bonds are an important funding tool in some member states, but they remain under-used in others. Thanks to the agreement reached today, the EU will have a framework in place which will give incentives to use these products across Europe and actively contribute to the development of the capital markets union.

Eugen Teodorovici, minister for finance of Romania

Covered bonds' markets are particularly developed in Germany, Denmark, France, Spain, Italy, Luxembourg and Sweden, as those countries have longstanding national regimes in place. In December 2015, the outstanding volume of covered bonds issued by EU-based institutions reached €2.1 trillion and constituted 84% of the total volume at global level.

The aim of the proposed framework (composed of a directive and a regulation), put forward by the Commission in March 2018, is to set minimum harmonisation requirements that all covered bonds marketed in the EU will have to meet. This will increase security for investors and open up new opportunities, in particular where markets are less developed.

The proposed framework:

  • provides a common definition of covered bonds;
  • defines the structural features of the instrument;
  • defines the tasks and responsibilities for the supervision of covered bonds;
  • sets out the rules allowing the use of the ‘European Covered Bonds' label;
  • strengthens the conditions for granting preferential prudential treatment to covered bonds under the capital requirement regulation.

Next steps

The political agreement on covered bonds will now be submitted to EU ambassadors for endorsement. It will then undergo a legal linguistic revision. Parliament and Council will be called on to adopt the proposed regulation and directive at first reading.



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