Covered bonds are financial products issued by a
bank or mortgage institution and backed against a
pool of assets that, in case of failure of the
issuer, can cover claims at any point of time.
They are a stable product with a track-record of
very low default rates and, as such, are seen as
a safe way to enable lending.
This is the first time that clear and uniform
criteria are being defined as to what exactly
constitutes a covered bond in the EU. This common
definition is expected to lead to an increase in
the use of this financial product, more lending
to the real economy, and the creation of a
European market in covered bonds. The legislation
was steered through the European Parliament
by Bernd
Lucke (ECR, DE).
A framework to increase the use of covered
bonds
The aim of the framework is to set minimum
harmonisation requirements that all covered bonds
marketed in the EU will have to meet. Notably,
this framework will:
- provide a common definition of covered bonds
and establish the criteria to obtain a ‘European
Covered Bond’ label;
- define how a covered bond instrument needs to
be designed;
- define the tasks and responsibilities for the
supervision of covered bonds;
- strengthen the conditions for granting
preferential prudential treatment to covered
bonds under the capital requirement regulation.
Quote
After the adoption of the new rules, Mr Lucke
said: “We achieve two aims with the new European
framework for Covered Bonds: The high product
quality is formalised by mandatory product
characteristics. This way, we facilitate future
product developments and contribute to financial
stability.
Furthermore, we promote the quality of the
product and make it more attractive for investors
at home and abroad. At the same time, the
legislation enlarges the market because member
countries which do not yet possess a specific
covered bonds legislation can now establish such
a legislation on a reliable and consistent
basis.”
Background
Covered bonds' markets are particularly developed
in Germany, Denmark, France, Spain, Italy,
Luxembourg and Sweden, as those countries have
longstanding national regimes in place. In
December 2015, the outstanding volume of covered
bonds issued by EU-based institutions reached
€2.1 trillion and constituted 84% of the total
volume at global level.
