On 27 October 2020, the European Commission issued a consultation on a draft Commission Delegated Regulation amending Commission Delegated Regulation 2015/61 on the liquidity coverage requirement (LCR) (LCR Delegated Regulation).

The LCR Delegated Regulation is applicable to all credit institutions, including those issuing covered bonds. Such credit institutions are currently subject to the LCR applicable for a period of 30 calendar days, during which a covered bond issuer has to ensure it has sufficient liquid assets (in the meaning of the LCR Delegated Regulation) to cover the net liquidity outflows (in the meaning of the LCR Delegated Regulation), including those stemming from the covered bond programme.

At the same time, the Covered Bond Directive (CBD) requires credit institutions issuing covered bonds to maintain at all times a liquidity buffer (cover pool liquidity buffer) composed of liquid assets available to cover the net liquidity outflows of their covered bonds programmes for a period of 180 days.

The cover pool liquidity buffer established by the CBD includes assets that meet all but one requirement to be recognised as liquid assets under the LCR Delegated Regulation: assets in the cover pool liquidity buffer are subject to the segregation requirement under Article 12 of the CBD, making them encumbered and therefore ineligible in the LCR liquidity buffer. Although the application of the segregation requirement is a key element of the CBD to ensure a high level of protection of covered bonds investors, it duplicates the liquidity requirements covered bonds issuers have to comply with, as two separate liquidity buffers composed of assets of similar quality need to be maintained at the same time. In particular, there is an overlap between the two requirements during the first 30 days. To ensure that Member States can address such overlap, the CBD includes an option for Member States to waive the specific cover pool liquidity buffer requirement for the time that the credit institution issuing covered bonds complies with other liquidity requirements under Union law. However, the exercise of this waiver to avoid double counting would not be prudentially sound because, after the separation of the credit institution’s estates in stress scenarios, it would reduce the liquid assets in the cover pool intended to respond to its own payment obligations.

To remove this overlap the draft Commission Delegated Regulation permits credit institutions to treat liquid assets held as part of the cover pool liquidity buffer as unencumbered up to the amount of net liquidity outflows from the associated covered bond programme. The draft Commission Delegated Regulation also seeks to clarify some of the existing rules in the LCR Delegated Regulation which are unrelated to the CBD. This includes replacing 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’ which is a term defined in point (139) of Article 4(1) of the Capital Requirements Regulation. This would better align the text with the LCR standard agreed at international level by the Basel Committee on Banking Supervision.

The deadline for comments on the consultation is 24 November 2020.