EBA欧洲银行-EBA-Report-on-EU-Covered-Bond-Frameworks-and-Capital-Treatment_164页_3mb

EBA Report Summary: EU Covered Bond Frameworks and Capital Treatment

Core Content Overview

This report, authored by the European Banking Authority (EBA), provides a comprehensive analysis of the legal, regulatory, and supervisory frameworks governing covered bonds in the European Union (EU). It addresses two key requests:

1. The European Commission’s call for advice on Article 503 of the Regulation (EU) No 575/2013 regarding the capital treatment of covered bonds.
2. The European Systemic Risk Board (ESRB)’s recommendation on the funding of credit institutions, which asked the EBA to identify best practices in covered bond legislation.

The report evaluates the prudential soundness of covered bonds, focusing on risk management, transparency, and the eligibility of specific cover asset classes for preferential risk weight treatment under the Capital Requirements Regulation (CRR).

Main Topics and Key Sections

1. Covered Bonds in the European Union

• The EU covered bond market has grown significantly since 2003, with total outstanding covered bonds reaching €2,813 billion by the end of 2012.
• The EU accounts for 89.5% of the total outstanding covered bond levels in 2012.
• Mortgage-covered bonds dominate the market, accounting for 80.2% of the total, followed by public sector covered bonds at 19.3%, and ship covered bonds at 0.5%.
• 90% of new issuance in 2012 was backed by mortgage collateral, compared to 84% in 2011.
• The five largest issuing countries in 2012 were Germany, Spain, Denmark, France, and Sweden.
• There are 26 active covered bond markets/jurisdictions in the EU, with at least seven countries in the process of updating or adopting covered bond legislation.

2. Legal and Regulatory Frameworks

• The report compares the legal and regulatory frameworks across EU Member States, highlighting common features and differences.
• Key areas include:
  • Structure of the issuer: Varies across jurisdictions but generally includes a legal entity that holds the cover assets.
  • Legal framework and bankruptcy framework: Covered bonds are typically bankruptcy-remote, meaning investors have a priority claim on the cover assets in case of issuer default.
  • Segregation of cover assets: Ensures that cover assets are segregated from the issuer’s general assets to protect investors.
  • Cover pool characteristics: Includes eligibility criteria, valuation standards, LTV (Loan-to-Value) limits, and concentration limits.
  • Coverage principle and over-collateralisation: A key mechanism to ensure that the cover assets exceed the liabilities of the covered bond programme.
  • Market and liquidity risk management: Includes stress testing, use of derivatives, and liquidity risk mitigation.
  • Monitoring of the cover pool: Involves both regulatory oversight and independent monitoring.
  • Compliance with EU regulations: Covered bonds must meet specific regulatory requirements and supervisory expectations.

3. Supervision of Covered Bonds

• The EBA outlines supervisory practices across Member States, including:
  • Pre-issuance supervision: Ensuring that the cover pool meets prudential standards before issuance.
  • Ongoing supervision: Monitoring the performance of the covered bond programme and the cover pool.
  • Post-issuer default supervision: Addressing the implications of an issuer's default and the resolution process.
  • Operational aspects: Includes the role of national competent authorities, special administrators, and supervisory reporting.

4. Transparency to Investors

• Disclosure requirements are critical for investor confidence.
• The EBA reviews national transparency templates and the ICMA investor disclosure template, highlighting areas for improvement.
• It emphasizes the need for harmonized disclosure standards to ensure consistent information for investors across the EU.
• CRAs (Credit Rating Agencies) use covered bond data to assess credit quality, but the current disclosure practices leave room for interpretation.

5. Specific Cover Asset Classes

• Aircraft loans as cover assets:
  • Covered bonds secured by aircraft liens are not eligible for preferential risk weight treatment due to limited issuance experience, lack of transparency, and complex valuation processes.
• Residential loans secured by a guarantee:
  • These are eligible for preferential treatment provided that additional criteria are met, such as the legal possibility of placing a first lien mortgage on the property in case of guarantor default and appropriate capitalisation of the guarantor.
• RMBSs and CMBSs as cover assets:
  • The EBA concludes that derogation in Article 496 of the CRR should not be extended to include RMBSs and CMBSs due to their complexity and lack of transparency.

EBA Recommendations

The report includes 10 key recommendations to improve the prudential soundness and harmonization of covered bonds across the EU:

1. Dual Recourse Mechanism: Ensure that covered bonds provide dual recourse to investors.
2. Asset Segregation and Bankruptcy Remoteness: Strengthen segregation of cover assets and ensure bankruptcy remoteness.
3. Cover Pool Features: Specify eligibility criteria, valuation standards, and LTV limits for cover pools.
4. Valuation of Mortgage Cover Assets: Standardize valuation methodologies and LTV criteria for mortgage assets.
5. Coverage Principle and Over-Collateralisation: Establish a minimum over-collateralisation level and improve coverage mechanisms.
6. Market and Liquidity Risk Management: Implement stress testing, hedging through derivatives, and liquidity risk mitigation.
7. Cover Pool Monitoring: Enhance monitoring practices and define roles of the competent authority.
8. Role of Competent Authority: Clarify the powers and responsibilities of national authorities in overseeing covered bonds.
9. Disclosure to Investors: Harmonize disclosure requirements and reduce interpretation room, especially for Article 129(7) of the CRR.
10. Preferential Risk Weight Treatment: Reconsider the eligibility of certain cover asset classes for preferential treatment, based on prudential concerns.

Key Findings

• Covered bonds have a strong historical performance with no defaults and low losses.
• The dual recourse mechanism and bankruptcy remoteness are key to the safety of covered bonds.
• Mortgage-backed covered bonds are the most common and are eligible for preferential risk weight treatment.
• Residential loans secured by a guarantee are eligible for preferential treatment if additional conditions are met.
• Aircraft loans and RMBS/CMBS are not recommended for preferential treatment due to complexity, lack of transparency, and limited issuance experience.
• The EBA recommends harmonization of disclosure and regulatory technical standards to ensure consistent application of prudential rules across the EU.
• The preferential risk weight treatment should be based on qualified criteria that reflect the credit quality and risk profile of the covered bond.

Conclusion

The EBA concludes that the current preferential risk weight treatment for certain covered bonds is adequate given the strong historical performance and the prudential safeguards in place. However, it recommends improvements in the legal and regulatory frameworks, particularly in over-collateralisation, liquidity management, disclosure requirements, and supervisory practices. The report also highlights the need for further convergence of the EU covered bond market to support a more European investor base and ensure common expectations for safety and soundness.