On 24 July 2018, the European Banking Authority (EBA) published a report setting out the outcome of its assessment of the European Commission’s call for advice on European Secured Notes (ESNs). The report makes 5 recommendations on key aspects for consideration by the European Commission when structuring the legislative framework for ESNs:

1. Small and medium-sized enterprise (SME) ESNs could be structured as a dual recourse instrument, however, in contract to covered bonds backed by real estate, the cover assets of ESNs would probably not be secured by a real estate-underlying security.
2. Based exclusively on the performance of the underlying assets, no preferential risk weight treatment could be justified for SME ESNs. However, taking into account the structural and cover assets enhancements proposed in Recommendation 1, a differentiated risk weight requirement compared with unsecured exposures to institutions could be considered.
3. The EBA considers that a dual recourse structure would not be appropriate in the case of infrastructure ESNs. Accordingly, most of the 2016 EBA best practices on covered bonds would not be relevant given the bespoke nature, complex structure and lack of granularity characterising infrastructure loans.
4. As the EBA advises against the dual-recourse feature for infrastructure ESNs, no assessment of its potential regulatory treatment has been carried out.
5. On the basis of the assessment made in the context of the report, the EBA is of the view that the introduction of SME ESNs will not give rise to asset encumbrance implications for the EU banking system as a whole that cause concern in the current financial environment. However, over-reliance on secured funding and increasing levels of asset encumbrance may pose additional risks at national level or to individual institutions.