Covered bonds are debt instruments secured by a pool of high-quality assets (such as mortgage loans or public sector debt) to which investors have a preferential claim in the event of default. Covered bonds are important long-term financing instruments in Europe. The EC has adopted covered bonds as an important instrument in the CMU. Covered bonds in the union are currently governed by domestic regulations and interwoven with different regulation directives, such as CRD IV, Solvency II, MiFID II and UCITS. The EC has launched a consultation to assess a possible future integrated European covered bond framework that could help improve funding conditions throughout the Union and facilitate cross border investment.
Harmonized regulation would contribute to an increase in quality and transparency of covered bonds and would enhance current requirements for the issuers of these products. These requirements may be in terms of increased supervision by authorities, increased transparency and stricter regulations concerning the contents and characteristics of covered pools. The enhancements may lead to higher administrative work load, continuous monitoring obligations of covered pools, disclosure obligations and new valuation requirements. Although regulatory developments in covered bonds are in an early phase, financial institutions that issue covered bonds are recommended to follow these changes closely, especially in regard to capital treatment requirements under CRR.
Author: Ivo Raschl