Background
On 27 November 2019, the EU adopted a covered bond legislative package composed of the Covered Bond Directive (CBD) and the Regulation on exposures in the form of covered bonds amending the Capital Requirements Regulation (CRR). Article 31 of the CBD mandates the Commission to submit several reports to the co-legislators on the implementation of the Directive. In order to produce these reports the Commission issued a CfA asking the EBA to provide technical advice.
The EBA has prepared its advice in collaboration with Member State competent authorities (NCAs). The advice includes recommendations for further policy action where appropriate.
Overview
The EBA assessed the performance and coherence of the CBD framework across four dimensions, identifying areas where further convergence, clarification or expansion may be warranted:
- Harmonisation of national frameworks: The EBA review highlighted persistent divergences among Member States, particularly regarding the eligibility of covered assets under Article 129 of the CRR. To reduce fragmentation, the EBA recommends restricting eligible assets to those compliant with Article 129; clarifying definitions of primary and substitution assets; and requiring the appointment of an internal cover pool monitor. Its advice also includes recommendations for Member States to define extension triggers via a clear, finite list of events and implement safeguards to ensure liquidity buffers can be credibly reconstituted in resolution or insolvency proceedings.
- Enhanced safeguards and disclosure requirements: To strengthen investor protection, the EBA calls for clearer rules on counterparty risk, including mandatory segregation of derivative contracts and posting of high-quality collateral in the event of issuer insolvency. It also recommends Member States to specify the conditions for deviating from statutory over-collateralisation requirements and to improve definitions within national coverage regimes. On ESG disclosure, the EBA recommends limiting climate risk disclosure under the CBD to immovable property assets on an annual basis and only where reliable metrics are available. It also recommends to the Commission clarifying how issuers should convey such information, requiring preferred (voluntary) formats for mandatory disclosures.
- Further alignment between CBD and CRR: The EBA recommends full alignment of credit risk treatment for real estate collateral across the CBD and CRR frameworks. It also recommends that the Commission assess valuation method inconsistencies and address the treatment of covered bonds upon issuer default under CRR III, noting CRR III’s credit risk provisions will continue to apply and that the EBA is open to a mandate to propose Level 1 text amendments where necessary.
- Scope expansion and international equivalence: The EBA endorses the introduction of a third-country equivalence regime based on alignment with the CBD’s core principles and the prudential regime under CRR. It recommends the scope of equivalence to be subject to strict conditions, including the provision of a list of potentially CRR-eligible covered bonds and a legal opinion certifying contract terms. While the EBA supports exploring new secured instruments considering a dual recourse-like instrument for SME financing, it calls for a cautious approach and recommends reopening the debate on the introduction of European Secured Notes.
The Commission will submit the outcome of the report to the European Parliament and the European Council in due course.