Local view for "http://purl.org/linkedpolitics/eu/plenary/2017-07-03-Speech-1-220-000"
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"en.20170703.26.1-220-000"1
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"Mr President, covered bonds have been a very successful debt instrument for more than 200 years in Europe. They are convenient and efficient for the issuing institutions and they are reliable assets for investors, in particular for financial institutions.
To conclude, what remains to be done, and what this report is silent on, is to remove the market distortions which set CBs at a competitive disadvantage vis-à-vis government bonds. Zero-risk weights for government bonds strongly influence buyers’ market demand by banks in favour of government bonds and are a great impediment in disentangling sovereign debt crisis from banking crisis.
It would be preferable to have all risk weights reflect market assessments of risk, and thereby remove a market distortion which disfavours CBs and involves great systemic risk. It would be good if the legislative proposal which the Commission will present to Parliament also addresses this issue.
This success relies on basically two factors. Factor one is economic: economically the success relies on the existence of high-quality collateral on long-lasting assets which are easily valued and repossessed. The second factor is institutional: institutionally the success relies on the existence of a legal and supervisory framework, such as dual recourse, segregation of cover pools and special public supervision.
Given the success of covered bonds, EU law has granted preferential treatment to covered bonds over other assets in various pieces of European legislation, in particular in the Capital Requirements Regulation (CRR), in the Bank Recovery and Resolution Directive (BRRD) and in the Liquidity Coverage Requirement (LCR) delegated act.
This preferential treatment is only justified if the collateral quality is high, so the first factor that I have mentioned is indeed satisfied. However, the problem is that Union law lacks a clear definition of covered bonds. The Undertakings for Collective Investment in Transferable Securities (UCITS) Directive definition is silent on precisely this first factor, on the quality of assets, relying merely on the institutional characteristics of covered bonds. This is not enough to warrant preferential treatment.
On the other hand, if we look at the second factor – the institutional environment – this suggests that the institutional environment might be expanded to other types of assets, perhaps more risky and less liquid types of assets and covered pools, such as SME credits, infrastructure projects which are not guaranteed by government, or consumer credits, and possibly to shipping finance.
The European Parliament is suggesting drawing a distinction between three different categories of assets, with the third and final class not called ‘covered bond’ but ‘European secured note’. We would like to distinguish between premium covered bonds and ordinary covered bonds, where the premium covered bonds are those which satisfy the higher criteria on the quality of assets that are specified in the CRR, whereas the ordinary covered bonds are merely UCITS compatible.
Parliament is also appealing to national lawmakers to distinguish clearly higher-risk or lower-liquidity assets from those assets which are eligible for UCITS-type covered bonds, leaving SME credits, infrastructure investments and consumer credits to a new instrument which, as I have said, would be called European secured notes.
Expanding the institutional environment to these riskier or less liquid classes of assets would be growth-enhancing, we believe, and would serve the objectives of the Capital Markets Union. Moreover, the European Union’s covered bond framework could then be a sort of gold standard for developing covered bond markets world-wide and could open up the EU capital market for issuers in third countries which make use of this efficient debt instrument, provided they have developed a comparable institutional framework.
However, we insist that EU legislation be principles-based. One of the principles which should not be compromised is financial stability, and we therefore advise that soft bullet and conditional pass-through structures, which shift issuer risk to investors, may play an important role in preventing fire sales in the event of defaulter resolution, but they should be used only in these cases and only with approval of the supervisory authority."@de2
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