COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Directive of the European Parliament and the Council on the issue of covered bonds and covered bond public supervision and amending Directive 2009/65/EC and Directive 2014/59/EU And Proposal for a Regulation of the European Parliament and the Council on amending Regulation(EU) No 575/2013 as regards exposures in the form of covered bonds
Date: 2018-03-12
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: bond, capital market, credit institution, financial legislation, financial supervision, investment, investment company, issue of securities, money-market liquidity, mortgage bank

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 12.3.2018 SWD(2018) 50 final  COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT  Accompanying the document Proposal for a Directive of the European Parliament and the Council on the issue of covered bonds and covered bond public supervision and amending Directive 2009/65/EC and Directive 2014/59/EU  And Proposal for a Regulation of the European Parliament and the Council on amending Regulation(EU) No 575/2013 as regards exposures in the form of covered bonds   {COM(2018) 94 final} - {COM(2018) 93 final}  - {SWD(2018) 51 final}  
 
 
1. 

INTRODUCTION 

One of the Commission's most important objectives is to stimulate investment and create jobs. 
To  achieve  that,  the  Commission  has  launched  a  number  of  initiatives  to  ensure  that  the 
financial  system  contributes  fully  in  that  regard.  First  among  those  is  the  Capital  Markets 
Union (CMU), which contains a series of initiatives aimed at unlocking funding for Europe's 
growth.  The  key  objective  of  CMU  is  to  stimulate  market  financing.  However,  as  bank 
financing is currently by far the most important funding channel in Europe, one of the actions 
of the CMU is to further leverage banking capacity to support the wider economy. One way to 
achieve that is to ensure that banks have a broad range of safe and efficient funding tools at 
their disposal. 

Covered bonds are important in that respect. Covered bonds are bonds issued by banks that 
are  secured  by  earmarked  assets  on  which  investors  have  a  priority  claim.  They  are  an 
important source of cheap and long-term funding for banks. They facilitate the financing of 
mortgage loans and public sector loans, thereby supporting lending more broadly.  

However,  covered  bonds  are  unevenly  developed  across  the  Single  Market.  They  are  very 
important  in  some  Member  States,  less  so  in  others.  Furthermore,  covered  bonds  are  only 
partially addressed in EU law. Whereas covered bonds benefit from a preferential prudential 
and regulatory treatment in several respects in light of their lower risks – e.g. banks investing 
in covered bonds do not have to set aside as much regulatory capital as when they invest in 
other assets – what constitutes a covered bond is not comprehensively addressed in EU law. 
Instead,  the  various  preferential  treatments  are  granted  to  covered  bonds  as  defined  in  the 
UCITS  directive  (2009/65/EC).  That  definition  was,  however,  not  drafted  with  this  broader 
purpose in mind but had a more limited scope (limiting what UCITS could invest in). 

The desire to further leverage banking capacity, the uneven market development of covered 
bonds and their incomplete regulatory treatment at EU level has given rise to questions as to 
whether a review of the EU legislative framework is needed. 

The Commission carried out a public consultation on covered bonds between September 2015 
and  January  2016,  which  already  gave  cautious  support  to  EU  wide  harmonization.  Since 
then, there has been a convergence of views on the merits of EU action. In December 2016, 
the EBA published recommendations on how to harmonise rules governing covered bonds. In 
March  2017,  the  Commission  received  a  study  commissioned  from  a  third  party  (ICF) 
highlighting the benefits and costs of a possible legislative framework on covered bonds. The 
co-legislators have also expressed their support for addressing covered bonds. The European 
Parliament  (EP)  has  called  for  the  establishment  of  a  European  legislative  framework  on 
covered bonds.1 Member States have also been supportive of further action subject to it being 
principle-based and in line with the EBA advice.2  

As a result, the Commission announced as part of the CMU Mid-term Review its intention to 
propose a legislative framework for covered bonds.3 In his latest State of the Union speech, 

1   European Parliament, (2017).  
2   Financial Services Committee, 12 July 2017. 
3   European Commission (2017a). The Mid-term Review also announced that the Commission will explore the 
possibility of developing European Secured Notes (ESNs) as an instrument using many of the key structural 
features of covered bonds, but aimed at SME bank loans and infrastructure bank loans. While the covered 
bond and ESN initiatives are closely linked, the case for ESNs is being assessed in parallel and according to 
a different timetable. As ESNs are backed by more risky assets, they will need further assessment and will 

1 

 
                                                 
the President of the European Commission confirmed that an enabling framework for covered 
bonds was part of the initiatives to be launched or completed by end-2018.4 

The purpose of this impact assessment is therefore to assess the case for action (chapter 2), set 
the  objectives  that  a  new  framework  should  aim  to  achieve  (chapter  3)  and  to  assess  and 
compare different options for achieving those objectives (chapters 4-6). 

2.  POLICY CONTEXT, PROBLEM DEFINITION AND SUBSIDIARITY 

2.1.  Background and context 

What are covered bonds? 
Covered bonds are debt obligations issued by credit institutions and secured on the back of a 
ring-fenced pool of assets (the "cover pool" or "cover assets") which bondholders have direct 
recourse  to  as  preferred  creditors.  Bondholders  remain  at  the  same  time  entitled  to  claim 
against  the  issuing  entity  or  an  affiliated  entity  of  the  issuer  as  ordinary  creditors  for  any 
residual amounts not fully settled with the liquidation of the cover assets. This double claim 
against  the  cover  pool  and  the  issuer  is  denominated  the  "dual  recourse"  mechanism. 
Furthermore,  the  cover  pool  usually  comprises  high  quality  assets  (e.g.  mortgage  loans  and 
public sector debt). The issuer is under an obligation to ensure that the value of the assets in 
the  cover  pool  at  least  matches  at  all  times  the  value  of  the  covered  bonds  and  to  replace 
assets that become non-performing, or otherwise do not meet the relevant eligibility criteria. 
These features reduce the risk of investments in covered bonds, thus providing a rationale for 
the  beneficial  regulatory  capital  requirements  as  set  out  in  Article  129  CRR  and  for  other 
favourable treatments envisaged in other pieces of EU legislation. 

Covered  bonds  are  among  the  largest  debt  markets  in  the  EU.  They  represent  an  important 
source of cheap and long-term funding for banks. They facilitate the refinancing of mortgage 
loans  and  public  sector  loans,  thereby  supporting  lending  more  broadly.  For  investors  they 
represent a safe investment, as  in case of repayment problems they are covered by both  the 
assets in the cover pool and by the issuer (dual recourse). The lower risk profile of the asset 
pool  and  the  dual  recourse  mechanism  reduce  the  required  rate  of  return  for  investors  and 
enable  mortgage  banks  to  raise  finance  more  cheaply  than  by  just  issuing  unsecured  bonds. 
This should normally increase the supply of funding available to the economy, in particular 
mortgages.  Although  residential  mortgages  finance  predominantly  real  estate,  entrepreneurs 
can  also  use  their  residential  property  as  collateral  for  financing  their  professional  activity; 
commercial mortgages finance business facilities (offices, productive capacity and shopping 
malls,  etc);  public  sector  loans  finance  local  infrastructure  (like  schools,  hospitals  etc)  and 
possibly  guarantee  SME  loans;  finally,  covered  bonds  in  some  cases  also  refinance  other 
assets  such  as  SME  loans  and  infrastructure  loans.  Covered  bonds  have  therefore  wider 
financing  benefits  beyond  banks  and  are  important  to  fulfil  broader  CMU  objectives. 
Moreover,  covered  bonds  proved  to  be  a  stable  source  of  funding  for  banks  during    the 
financial crisis compared to the more volatile senior unsecured debt issued by banks.  

have a separate impact assessment process to assess the merits of legislative action. In light of the above, the 
SME issue is not within the scope of the present impact assessment. 

4   European Commission, (2017b). 

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The EBA mandates and Reports  

On  1  July  2014,  the  EBA  issued  a  ‘Report  on  EU  covered  bond  frameworks  and  capital 
treatment’ (2014 EBA report)5 which, in line with the mandate given to the EBA in the ESRB 
recommendation  on  the  funding  of  credit  institutions  from  December  2012  (ESRB 
recommendation6),  identified  best  practices  with  a  view  to  ensuring  robust  and  consistent 
frameworks for covered bonds across the EU. The report also contained the EBA’s opinion on 
the adequacy of the current prudential treatment of covered bonds, following a call for advice 
from the Commission from December 2013 based on the Article 503 of the CRR. 

As a follow-up to the identification of best practices, the ESRB recommended to the EBA to 
monitor the functioning of the market for covered bonds by reference to these best practices 
for a period of 2 years. By 2016, the EBA was requested to deliver a final report to the ESRB 
and  to  the  Council  and  the  Commission  containing  an  assessment  of  the  functioning  of  the 
market  for  covered  bonds  under  the  best  practice  principles  and  its  view  on  recommended 
further action if deemed desirable. 

In response to this recommendation, in December 2016 the EBA issued a "Report on covered 
bonds  -  Recommendations  on  harmonisation  of  covered  bond  frameworks  in  the  EU".7  The 
report  was  the  subject  of  a  public  hearing  on  November  2016.  This  Report  includes  a 
comprehensive  analysis  of  regulatory  developments  in  covered  bond  frameworks  in 
individual Member States, with a particular focus on the level of alignment with the EBA’s 
best practices. It also provides an assessment of the latest market trends, as well as regulatory 
developments  that  have  taken  place  at  the  European  level.  Building  on  the  results  of  the 
analysis, the report advocates for EU legislative action for harmonizing covered bonds at EU 
level and presents a comprehensive proposal to this purpose. 

The EP Report  

On  4th  July  2017,  the  European  Parliament  approved  an  own-initiative  report  on  covered 
bonds  titled  "Towards  a  pan-European  covered  bonds  framework"8.  The  Report  has  been 
presented before the Committee on Economic and Monetary Affairs (ECON) and the Plenary 
by  the  Rapporteur  Bernd  LUCKE  (ECR/DE).  The  report  supports  the  harmonisation  of 
covered bonds at EU level, calling the Commission to present a principles-based Directive for 
a European Covered Bonds framework. The report recognizes that covered bonds are sound 
financial  products  and  that  some  national  frameworks  are  already  very  successful.  It  also 
raises  the  concern  that  a  fully-fledged  harmonisation  aiming  at  a  one-size-fits-all  European 
model  would  have  negative  consequences.  It  therefore  proposes  a  principle-based  approach 
based  on  high  quality  standards  and  best  practices  but  leaving  means  and  ways  to  Member 
States to adapt the EU framework to their national specificities.  

The ICF study  

In  2016  the  Commission  launched  a  tender  for  a  study  on  covered  bonds  to  assess  their 
current market performance and the costs and benefits of potential EU action. The study has 

5   EBA (2014).  
6   ESRB (2012). 
7   EBA (2016).  
8   European Parliament Report (2017). 

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been awarded to the consultancy ICF, which delivered their final report in March 20179. The 
Commission  published  it  in  May  2017.  On  the  basis  of  a  literature  review;  qualitative  and 
quantitative analysis and stakeholder interviews (issuers, investors, supervisors…), the study 
documents a number of costs and benefits of EU action. In terms of costs, these relate to: i) 
costs for issuers to establish new covered bond programmes; ii) transition costs; and iii) risks 
of undermining well-functioning national markets. As regards benefits, one key benefit of the 
new EU framework would be a reduction of the overall default probability of covered bonds 
due  to  the  strengthening  of  the  credit  characteristics  of  the  instrument.  This  credit 
strengthening would translate into materially lower borrowing costs for EU credit institutions 
issuing  covered  bonds  of  several  basis  points.  The  study  also  highlights  other  benefits  (e.g. 
reducing  regulatory  fragmentation;  facilitating  reduction  of  asset  and  liability  mismatches; 
and, facilitating capital market access to small and medium-sized issuers), though it does not 
quantify them. Overall, the study finds that benefits exceed costs and therefore EU action is 
justified.    

The European Secured Note (ESN) initiative  

The  European  Secured Note  (ESN)  is  defined as  a  dual-recourse  financial  instrument  on an 
issuer's  balance  sheet  applying  the  basic  structural  characteristics  of  covered  bonds  to  two 
non-traditional  cover  pool  assets  -  SME  bank  loans  and  infrastructure  bank  loans.  The 
Communication on the Mid-term Review of the Capital Markets Union (CMU) Action Plan of 
June 2017 announced that along with an EU framework on covered bonds, the Commission 
will assess the case for ESNs in order to strengthen the banking sector's lending capacity and 
support the wider economy. While the covered bond and ESN initiatives are closely linked (as 
the ESNs make use of most structural features of covered bonds and transfer the covered bond 
technology  to  non-mortgage  cover  pools),  it  has  been  decided  to  follow  a  separate  parallel 
path for ESN in order to protect the strong reputation covered bonds earned in the last decades 
in  European  financial  markets.  As  ESNs  are  backed  by  more  risky  assets,  they  would 
inevitably  represent  a  riskier  instrument  and  their  perceived  higher  risk  could  affect  the 
perception of traditional covered bonds. Member States, supervisors and market stakeholders 
all have expressed their reserves against connecting the two instruments. The opportunity of 
an  EU  initiative  on  ESN  will  therefore  be  subject  to  a  separate  impact  assessment.  This 
approach is shared by the co-legislators. Following the ECOFIN Council Conclusions of 11 
July10,  Member  States  discussed  ESNs  at  the  Financial  Services  Committee  meeting  on  12 
July  based  on  a  non-paper  prepared  by  the  Commission.  Member  States  were  overall 
supportive of the ESN initiative subject to clear differentiation of ESNs from covered bonds 
and  further  analysis.  In  its  report  on  a  pan-European  covered  bonds  framework  issued  in 
July11, the European Parliament (EP) has expressed support for the establishment of ESNs and 
called on the Commission to develop principles of a legal framework for ESNs. 

In  order  to  prepare  a  specific  impact  assessment12,  the  ESN  work  stream  will  build  on  the 
EBA  advice  (to  be  delivered  by  30  April  2018),  on  a  feasibility  study  by  an  external 
contractor (to be delivered on 30 April 2018) and on data collected with the help of the ECBC 

ICF (2017). 

9  
10   Council  conclusions  on  the  Commission  Communication  on  the  mid-term  review  of  the  Capital  Markets 

Union Action Plan, 11.07.2017 

11   European parliament, Towards a pan-European covered bonds framework, (2017/2005(INI)), 26.06.2017 
12    Issues that need to be evaluated are the following: the potential demand for ESNs, default rates of SME and 
infrastructure bank loans, cover pool quality and eligibility criteria, geographical diversification of the cover 
pool, interest of international investors, liquidity risk profile, data infrastructure, system of supervision and 
administration, potential non-traditional amortisation structures and effect on markets for other asset classes.  

4 

 
                                                 
Task Force on ESNs. The Commission will also launch an open public consultation on ESNs 
by the end of 2017.  

2.1.1.  Nature and size of the market concerned  

As  outlined  above,  covered  bonds  are  an  important  funding  tool  that  has  been  subject  to 
significant  policy  attention  recently.  This  section  further  describes  covered  bond  markets  in 
terms  of  the  size  of  the  market;  who  issues  and  invests  in  covered  bonds;  and,  the  type  of 
assets  used  as  collateral.  This  section  also  compares  covered  bond  issuance  with  another 
funding tool of banks, i.e. securitisation.  

Outstanding volumes  

According to information compiled by ICF13, as of December 2015, the outstanding volume 
of  covered  bonds  reached  EUR2.5  trillion  at  the  global  level,  of  which  EUR2.1  trillion  has 
been  issued  by  EU  resident  institutions.  To  put  it  into  perspective,  this  figure  amounts  to 
about 1.2 times the outstanding volume of corporate bonds issued by non-financial institutions 
in the EU (which stood at EUR1.8 trillion in 2015) and 4.8 per cent of the aggregate balance 
sheet of EU banks (EUR43.3 trillion in 2015).  

Covered  bonds  are  predominantly  an  EU  instrument.  The  EU  represents  84  per  cent  of  the 
global outstanding volumes, followed by 11 per cent of non-EEA countries and 5 per cent of 
non-EU  EEA  countries.  Although  still  comparatively  small  in  absolute  terms,  the  non-EEA 
markets  have  recently  been  growing  rapidly:  between  2003  and  2015,  non-EEA  markets 
posted a compound annual growth rate of 20 per cent compared to 3 per cent for the EU. One 
of the reasons why the EU has a comparatively large market for covered bonds is the fact that 
many Member States have longstanding enabling legal framework for covered bonds in place.  

Figure 1.  Evolution of Total Outstanding Covered Bonds [2003-2015, in EUR billion] 

Source: ICF, 2017 

As shown in Figure 1, the global covered bond market has grown steadily for more than 20 
years, in particular since 1995. From roughly 2003 until the financial crisis, the twin drivers 
of  overall  market  growth  were  the  introduction  of  covered  bond  regimes  in  many  new 

13   Data in this section come from ICF (2017). 

5 

 
 
                                                 
jurisdictions  and  the  tightening  spread  environment.  During  the  financial  crisis  the  issuance 
level  was  relatively  high  as  issuers  relied  more  heavily  on  covered  bond  funding  than  on 
unsecured bonds. Some of the increase in market size from 2007 to its peak in 2012 can be 
attributed to issuers switching their funding sources from unsecured to secured funding. The 
other main driver of higher reported levels of covered bonds outstanding in the same period 
was  the  increase  in  bonds  issued  purely  for  use  as  collateral  to  access  the  funding  made 
available  by  the  ECB14.  Since  2012,  the  global  market  size  has  shrunk  slightly:  outstanding 
bonds contracted by 7 per cent in 2013 before declining more slowly to €2.5 trillion in 2015. 
This global decrease was driven by a decline in EU covered bonds, with the rest of the world 
still experiencing a slow but steady increase in the size of covered bond markets. Anecdotally, 
the main reasons for the decline in the  EU covered bond market have been a normalisation of 
the  spread  differential  between  covered  and  unsecured  bank  bonds,  less  use  of  central  bank 
emergency funding facilities (therefore less need for covered bonds as collateral), low levels 
of  growth  in  bank  lending  in  general,  and  mortgage  lending  in  particular,  and  regulatory 
developments including the need for banks to raise more funding in the form of capital (and 
other  bail-in eligible liabilities).  

As  shown  in  figure  2,  within  the  EU,  Germany  remains  the  largest  market  in  terms  of 
outstanding volume (384 bn EUR), closely followed by Denmark (383 bn EUR), France (323 
bn EUR), Spain (281 bn EUR), Sweden (222 bn EUR), Italy (131 bn EUR) and the UK (121 
bn  EUR).  The  four  largest  markets  still  account  for  almost  two-thirds  of  the  EU  market  in 
2015 (vs. 97 per cent in 2003). 

Figure 2.  Size of the seven largest markets in terms of outstanding volumes (2015) 

Source: ICF, 2017 

Issuance  

As of 2015, there were 317 active  covered bond issuers15 globally (261  in the EU) and 434 
covered bond programmes, in 30 countries. Within the EU, there has been an increase in the 
number of issuers from 139 in 2003 to 261 in 2015. Germany is still the top EU country in 
terms  of  the  number  of  credit  institutions  issuing  covered  bonds  (79).  Spain  has  31  active 
issuers,  followed  by  Austria  (27),  France  (19),  the  UK  (15)  and  Italy  (13).  There  are  also 
substantial differences between the countries in terms of the typical size of the issuer. 

14   Within the Eurosystem Collateral Data, covered bonds make up 19 per cent of assets used as collateral. 
15   Issuers of covered bonds can only be credit institutions. 

6 

 
 
 
                                                 
Up until 2012, the annual level of issuance in the EU increased substantially, rising from €394 
billion  in  2003  to  €613  billion  in  2011.  This  upward  trend  halted  temporarily  in  2012  and 
2013 (-2 per cent and -39 per cent respectively). The market quickly recovered – with year-
on-year growth rates standing at +4 per cent and +20 per cent in 2014 and 2015 respectively – 
to reach a level of €454 billion. 

Denmark  is  the  country  with  the  largest  new  gross  issuance  volumes  in  2015  (EUR164bn). 
Other major issuers are Sweden (EUR61bn), Germany (EUR58bn), France (EUR45bn), Spain 
(EUR42bn) and Italy (EUR29bn). 

Non-EEA issuers are catching up and their share increased from 1 per cent in 2003 to 11 per 
cent in 2015. The number of countries outside the EEA with active covered bond markets has 
grown:  Singapore  is  the  latest  2015  addition  to  a  list  already  containing  Australia,  Canada, 
New Zealand,  Switzerland, South Korea  and Turkey.  The US  is  not  active in  the  market of 
covered bonds due to the different structure of their mortgage market which is dominated by 
the two public agencies Fannie Mae and Freddie Mac. 

Composition of the cover pool 

In  terms  of  outstanding  volumes,  the  two  traditional  asset  classes  still  dominate  the  EU 
market: mortgages represented 80 per cent of the cover pool in outstanding covered bonds in 
2015 and public sector debt 16 per cent, the rest accounting for other assets such as ships.    

Figure 3.  Composition of the cover pool in EU countries’ outstanding covered bonds [2003-2015], 

figures in bars are in € billion 

Source: ICF, 2017 

As shown in figure 3, the composition of the cover pool in the EU is gradually shifting away 
from public sector debt towards mortgage debt. Public sector debt represented 59 per cent of 
total  assets  in  2003  and fell  to  16  per  cent  in  2015,  while  mortgages  increased  from  38  per 
cent in 2003 to 80 per cent in 2015. This trend is confirmed by the composition of the cover 
pool of new issuances. 

7 

 
 
 
Investor base 

Banks  and  central  banks  are  the  most  important  investors  in  covered  bonds,  accounting  for 
almost  two-thirds  of  the  markets  (32  per  cent  and  31  per  cent  each  in  2016),  as  shown  in 
Figure  4.  Asset  managers’,  insurance  companies’  and  pension  funds’  investment  in  this 
market  account  for  the  remaining  third  (about  36  per  cent  in  2016).  Retail  investors  do  not 
play  a  significant  role  in  this  market  (they  are  included  in  the  category  others  which  itself 
represents  only  1%).  This  is  mainly  explained  by  the  fact  that  in  most  cases  the  minimum 
denomination of covered bonds is 100.000 EUR. The two countries with the largest covered 
bond  markets  (Germany  and  Denmark)  allow  retail  investors  to  directly  invest  in  covered 
bonds. While in Denmark, in spite of this possibility, retail investors do not invest in covered 
bonds,  in  Germany  saving  banks  sell  covered  bonds  to  their  customers  in  the  secondary 
market  only  (there  are  no  retail  investors  in  primary  markets).  However,  the  share  of  retail 
investors in secondary markets is quite modest, slightly higher than 1%, but in any case not 
exceeding 10%.16 Based on the above, the covered bond market does not look suited to retail 
investors. Therefore, the possible role of covered bonds as potential retail investment products 
and  the  related  possible  adaptations  of  the  disclosure  requirements  are  not  assessed  in  this 
impact assessment. Whilst retail investors play no significant direct role, they are nevertheless 
important  players  by  (indirectly)  providing  funds  to  insurance  /  asset  managers  that  then 
invest in covered bonds on their behalf. 

Figure 4. 

Investor distribution by investor group (by year) 

Source: ICF, 2017 

Two factors dominate recent trends in the investor distribution of covered bonds: 

  Firstly, negative or very low absolute yields have reduced the purchases of covered bonds 
by asset managers, pension funds and insurance companies. Their shares among investors 
declined from 44 per cent in 2010 to 36 per cent in 2016. 

16   No  reliable  figures  exist  on  the  share  of  retail  investors  in  German  covered  bond  secondary  markets. 

Estimates reported in the text come from VDP (Association of German Pfandbrief Banks). 

8 

 
 
                                                 
  Secondly,  central  banks  have  significantly  increased  their  investments  in  covered  bonds 
over the past years (12 per cent in 2010 to 31 per cent in 2016) – as a consequence of the 
successive Covered Bond Purchase Programmes (see next section).  

ECB purchasing programme  

Covered  bonds  are  an  important  instrument  in  the  conduct  of  monetary  policy  in  the  euro 
area.  The  Eurosystem  has  taken  a  number  of  extraordinary  measures  in  support  of  covered 
bond markets during the financial crisis, becoming the larger buyer of covered bonds in the 
EU (nearly a third of the market).  

CBPPs  are  successive  interventions  of  the  Eurosystem  and  represent  key  elements  of  the 
ECB's  asset  purchase  programmes,  initially  aimed  at  restoring  liquidity  in  the  inter-banking 
market  and  facilitating  the  monetary  policy  transmission,  and  recently  being  part  of  the 
quantitative  easing  policy.  Concretely,  the  Eurosystem  purchases  covered  bonds,  both  in 
primary  and  secondary  markets.  The  first  two  CBPPs,  both  one-year  programmes,  were 
implemented in 2009/10 and 2011/12 respectively. The third, CBPP3, began in October 2014 
and  is  ongoing.  By  the  end  of  2016,  CBPP3  holdings  stood  at  €203  billion,  70  per  cent  of 
which was on secondary markets. Recent data suggest that by early 2017, the Eurosystem has 
already  bought  €210  billion  of  bonds  under  its  third  programme.  CBPP3  substantially 
impacted the composition of covered bonds’ investor base  – with the share of central banks 
reaching 31 per cent in 2015/16 (up from 16 per cent in 2014 and 8 per cent in 2013). CBPP3 
has also impacted supply and translated into an expansion of the covered bond issuer base.  

Covered bonds and the real estate market  

The importance of covered bonds for the real estate market is exemplified by the following 
numbers  (ECBC  data).  Covered  bonds  cover  an  average  of  30%  of  residential  mortgages 
lending in the EU in 2015. There is a high degree of variability across countries. In Denmark 
all  residential  mortgages  are  financed  through  covered  bonds.  In  other  Northern  countries 
(Sweden and Finland) the percentage is also quite high (between 37 and 60%). Slightly lower, 
but still above one third is the share in Mediterranean countries (Spain, Italy, Portugal). The 
percentage is 23% in France and 16% in Germany. 

There is a close relationship between the level of development of covered bond markets and 
the interest rates on mortgages. The country with the lowest interest spreads on mortgages is 
Denmark with an average short-term interest rate spread of 1.28% in 2015. Denmark is also 
the  country  in  the  EU  with  one  of  the  best  developed  covered  bond  markets  and  with  the 
highest proportion of covered bonds in terms of banking assets (37.4%, see table 2).17 Figure 
5  shows  that  an  inverse  relationship  between  short-term  interest  rate  spreads  on  mortgages 
and  development  of  covered  bond  markets  exists  for  all  EU  countries  with  available  EMF 
data (a similar, slightly less negative relationship can be seen on long-term rates)18.  

17   This is also recognized by the Commission Country Report on Denmark (2017) which explicitly states that 
the unique Danish mortgage system has been able to provide households with  a large number of low-cost 
mortgage loans, resulting in one of the lowest mortgage rates in the EU (p. 17). 

18   The inverse relationship holds also eliminating outliers DK and SE. In that case, the correlation coefficient 

(R-squared) decreases from 0.24 to 0.18. 

9 

 
                                                 
Figure 5.  Relationship  between  short-term  mortgage  spreads  and  level  of  development  of  covered 

bond markets (outstanding covered bonds as a share of bank assets), 2016. 

Sources: EMF, ECBC, ECB, Eurostat 

This  negative  correlation  between  covered  bond  market  development  and  mortgage  spreads 
does of course not imply a causal relationship as there are a large range of other factors that 
influence spreads in different countries that cannot easily be controlled for. However, a high 
level of development of covered bond markets and a lower cost of funding for banks can be 
considered  conducive  to  expand  the  availability  of  credit  to  the  real  economy  and  to  lower 
lending rates. There is a relative consensus in the economic literature that bank's funding costs 
gradually pass through to lending rates. More specifically, research suggests that policy and 
market interest rates get to a large extent reflected in retail lending rates over a longer term 
horizon, while the short-term adjustment may be sluggish (see a review in De Bondt, 2002). A 
breakdown in the relationship between policy rates and lending rates has been observed in the 
aftermath  of  the  global  financial  crisis  in  some  euro  area  countries  (Darracq-Paries  et  al, 
2014). However, Illes et al. (2015) show that the pass-through has been comparably high in 
the pre- and post-crisis periods, once we account for banks' actual funding costs. 

Covered bonds vs securitization  

Another  source  of  funding  for  banks  which  has  similar  features  to  covered  bonds  is 
securitization. The Commission's objective is to provide the widest possible panoply of safe 
and efficient funding instruments for the banking sector to support banks' lending to the real 
economy.  

In spite of their similarities, covered bonds and securitization feature different characteristics 
which  make  them  suitable  for  different  purposes  and  strategies  both  for  issuers  and  for 
investors.  The  main  difference  between  the  two  is  the  dual  recourse  mechanism:  in 
securitization the holder of the securitized product does not hold any claim towards the issuer. 
The  originate-to-distribute  model  which  mainly  underpins  securitization  can  be  tempered  in 
order  to  ensure  the  issuer  keeps  some  "skin  in  the  game"19.  By  contrast,  by  keeping  a  full 
enforcing claim towards the issuer, covered bonds ensure full "skin in the game" by design. 
That  is  one  of  the  reasons  why  historically  EU  legislators  have  been  ready  to  grant  a 

19   See for example G. Chemla and C. Hennesy (2014), pp. 1597–1641. 

10 

 
 
 
  
                                                 
significant preferential prudential treatment to covered bonds (see next section) which is not 
matched by the treatment granted to securitization. Thus the same underlying assets enjoy a 
better prudential treatment if they are used as collateral in the cover pool of a covered bond 
than  if  they  are  securitized.  This  means  holding  covered  bonds  is  more  convenient  for 
investors  in  terms  of  capital  requirements  (especially  for  banks)  than  holding  securitized 
products. 

The special treatment covered bonds enjoy appears justified if one considers how differently 
the two products fared during the financial crisis. Whereas covered bonds proved to be a less 
pro-cyclical  product  during  that  period  of  stress,  as  they  offered  a  long-term  and  stable 
funding source for banks at a moment when funding channels were drying up, securitization 
fared differently. Though securitization in the EU did not fare as badly as in the US, it still 
suffered  the stigma of the crisis which led to  the collapse of the market. To respond to  this 
market  failure,  the  Commission  proposed  rules  for  a  simple  and  transparent  securitization. 
This  is  another  important  difference  between  the  two  instruments:  while  the  market  for 
securitization was broken after the crisis and needed to be fixed, in the case of covered bonds 
the market continued to work well. The rationales underpinning action in these two areas are 
therefore of a different nature.  

Overall,  the  two  products  both  present  advantages  and  disadvantages.  It  is  up  to  banks  and 
investors to assess them and choose the more appropriate funding/investing tool for them at a 
specific  point  in  time  based  on  their  balance  sheet  and  risk/liquidity  requirements.  The 
objective of the Commission is to ensure that banks have a wide range of safe and efficient 
funding tools at their disposal. This is why it proposed legislation on simple, transparent and 
standardised securitisations and is the reason why it is assessing the case for action as regards 
covered bonds.   

2.1.2.  Overview of legislative framework  

Covered  bonds  are  mainly  regulated  at  national  level.  Most  Member  States  have  working 
covered bond markets in place.20 Others either do not have covered bond frameworks in place, 
or  their  frameworks  are  outdated,  the  effect  being  that  there  is  virtually  no  active  covered 
bond market in those Member States.21  

The  national  regimes  in  place  are  different,  e.g.  in  terms  of  public  supervision,  disclosure, 
composition of the cover pool22. The different national covered bond regimes impact on the 
credit  strength  of  the  instrument  and,  therefore,  on  the  degree  to  which  instruments  issued 
under different jurisdictions are eligible for EU wide preferential treatment.  

There is currently no EU-wide dedicated legislative framework for covered bonds. There is, 
however, a body of EU law that regulates the prudential treatment for investments in covered 
bonds (Figure 6).  

20   AT, BE, CZ, DK, FI, FR, DE, EL, ES, HU, IE, IT, LU, NL, PL, PT, SE and UK. 
21   Examples of Member States without a framework include Croatia, Estonia and Malta. Examples of outdated 
frameworks include Bulgaria, Cyprus, Latvia, Lithuania, Slovenia. In Slovakia, covered bond legislation has 
been recently amended following the lines of the EBA best practices and is set to come into effect in January 
2018. In Romania the legal framework has just been amended. 

22   For an overview of the differences in national regimes see EBA (2016) and ICF (2017) p. 16  

11 

 
                                                 
Figure 6.  EU rules regulating covered bonds  

Source: Commission services, 2017 

The  treatment  of  covered  bonds  under  EU  law  differs  from  the  Basel  rules  (or  other 
international  standards,  for  example  IOSCO),  which  do  not  grant  specific  preferential 
treatment to covered bonds. 

The remainder of this section outlines the different aspects of preferential treatment in further 
detail. 

Higher investment limits for UCITS  

Under the UCITS Directive23, a “UCITS” (i.e. certain investment funds) cannot invest more 
than 5 per cent of its assets in transferable securities issued by the same entity. Article 52(4) 
of the UCITS Directive, however, allows Member States to raise this investment limit to 25 
per  cent  for  investments  in  “UCITS  compliant  covered  bonds”  issued  by  a  single  entity. 
Article  52(4)  specifies  the  following  minimum  requirements  for  covered  bonds  as  the  basis 
for easing of prudential investment limits: 

  The  covered  bond  issuer  must  be  a  credit  institution  with  a  registered  office  in  an  EU 

Member State; 

  The  issuer  should  be  subject,  by  law,  to  special  public  supervision  designed  to  protect 

bond-holders; 

  The  cover  asset  pool  must  provide  sufficient  collateral  to  cover  bondholder  claims 

throughout the whole term of the covered bond; and 

  Bondholders  must  have  priority  claim  on  the  cover  asset  pool  in  case  of  default  of  the 

issuer. 

Article 52(4) also obliges Member States to send the Commission a list of covered bonds that 
comply with the above criteria together with the categories of issuers authorised to issue such 

23 Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (UCITS). 

12 

 
 
 
                                                 
bonds. Article 52(4) accordingly de facto defines a covered bond for EU regulatory purposes, 
serving as a reference for several other pieces of EU legislation. 

Lower capital requirements for banks investing in covered bonds 

According  to  the  Capital  Requirements  Regulation  (CRR)24,  credit  institutions  must  hold 
regulatory capital in respect of debt securities held on their books, risk-weighted according to 
the type of issuer and obligation. However, article 129 CRR allow those investing in covered 
to hold lower levels of regulatory capital in relation to these instruments as compared to other 
debt such as senior unsecured bank debt.25 These lower capital requirements are referred to by 
the  CRR  as  "preferential  risk  weights".  These  preferential  risk  weights  are,  however,  only 
available for "qualifying covered bonds”. To qualify for preferential treatment, covered bonds 
must be (a) UCITS compliant [Art. 129 (1) CRR]; (b) secured by specific cover assets [Art. 
129 (1) CRR]; and (c) satisfy various transparency requirements [Art. 129 (7) CRR]. 

Art 129 is addressed to bank investors who use the standard approach to capital risk weight 
allocation. While  the internal  ratings  based  approaches are  substantially  more  complex  they 
also allow similar levels of preferential risk weighting treatment.  

Special treatment in recovery and resolution  

Article  44(2)  of  the  Bank  Recovery  and  Resolution  Directive  (BRRD)  26  exempts  UCITS-
compliant covered bonds from the scope of the bail-in tool. It should be highlighted, however, 
that the BRRD limits this exemption up to the level of collateral in the cover pool.  

Apart from bail-in, the application of other resolution tools might also have implications for 
covered  bonds,  particularly  in  the  context  of  partial  transfer  of  assets/liabilities  to  bridge 
institution  or  asset  management  vehicles.  The  BRRD  also  provides  for  safeguards  to  be 
applied in the case of partial transfers (Article 76), and Article 79 requests Members States to 
ensure— in the event of the partial transfers—appropriate protection of covered bonds and to 
prevent the assets, rights and liabilities from being separated under a partial transfer, or being 
terminated or modified through the use of ancillary powers.  

Lower solvency capital requirements for insurance undertakings investing in covered bonds 

Article 180(1) of the Solvency II Delegated Regulation lays down the capital requirements for 
(re)insurance  undertakings  investing  in  covered  bonds.27  The  term  'covered  bond'  is  not 
defined within the Solvency II Delegated Regulation itself. The definition is derived from the 
UCITS Directive Article 52(4). The Delegated Regulation contains certain risk calibrations in 
its  standard  formula  which  is  used  by  many  insurers28  to  compute  their  solvency  capital 
requirement. The Delegated Regulation contains a preferential treatment for covered bonds in 
comparison with similar rated corporate bonds. The risk calibrations for covered bonds are in 

24 Capital Requirement Regulation (EU) No 575/2013 (CRR).  
25 E.g. 10 per cent risk weight for a "credit quality step 1" covered bond compared to 20 per cent for another type 

of direct exposure to a credit institution of the same step. 
26 Bank Recovery and Resolution Directive No 59/2014 (BRRD) 

27   Commission's Delegated Regulation (EU) 2015/35 (Solvency II Delegated Act) 
28   Some insurers who have received an approval to their internal models do not use the risk calibrations in the 

standard formula. These are typically large insurance companies.  

13 

 
                                                 
between  those  applicable  to  corporate  bonds  and  government  bonds,  provided  the  covered 
bonds are highly rated. 

Favourable treatment in banks' liquidity requirements 

The LCR Delegated Act requires that banks hold enough high quality liquid assets to cover 
the difference between the expected outflows and inflows over a 30-day stressed period.29 It 
provides favourable treatment to covered bonds by allowing credit institutions to hold covered 
bonds  as  part  of their liquidity  requirements i.e. it allows credit  institutions to  treat covered 
bonds as liquid assets of level 1, if they qualify as "extremely high quality", or as level 2, if 
they are so called "high quality", for the purposes of calculating their liquidity coverage ratio 
(LCR). The LCR Delegated Act sets out a number of specific criteria to differentiate between 
covered  bonds  of  level  1  and  2  and  also  incorporates  by  reference  the  well-established 
covered bond definition contained in Article 52(4) of the UCITS Directive. 

Specific treatment of cover pool derivatives as regards clearing 

Under  the  EMIR,  derivatives  should  normally  be  cleared  through  a  central  clearing 
counterparty.  As  covered  bond  derivatives  contain  certain  non-standard  clauses  they  are 
typically  not  eligible  for  CCP  clearing.  The  Regulatory  and  Implementing  Technical 
Standards (RTS) under this regulation for risk mitigation for derivatives that are not cleared 
provide for a specific treatment of cover pool derivatives.30 Under a specific set of conditions, 
covered  bonds  issuers  or  cover  pools  should  not  be  required  to  post  collateral  for  the 
derivatives  held  to  hedge  risks  inherent  to  the  cover  pool.  To  obtain  this  treatment,  the 
derivatives must meet certain conditions including compliance of the covered bonds to whose 
cover  pool  they  belong  to  with  Article  129  of  the  CRR  and  with  a  minimum  level  of 
overcollateralization of 2%.  

2.2. 

Problem definition  

Covered bonds are an important funding tool for banks. Their markets are well-developed in 
some  Member  States  and  less  so  in  others.  Given  their  particular  risk  features,  they  also 
benefit from a preferential prudential treatment in several respects. This treatment rests on a 
definition  of  covered  bonds  set  out  in  UCITS,  which  originally  was  developed  with  a  more 
limited purpose in mind. Taken together, this gives rise to two sets of concerns.  

The  first  is  related  to  the  untapped  CMU  potential.  Covered  bond  markets  are  currently 
fragmented  along  national  borders,  and  national  regulatory  frameworks  differ  significantly. 
This creates legal uncertainty and gives rise to the following problems:  

(1) 

(2) 
(3) 
(4) 

covered  bond  markets  are  unevenly  developed  across  the  EU:  not  all  banks  from 
different countries and of different size are able to exploit the cheap and stable source 
of funding that covered bonds represent;  
the investor basis is not sufficiently diversified;  
there is untapped potential for cross border investments;  
investments from outside the EU are low.  

29   Commission's Delegated Regulation (EU) 2015/61 with regard to liquidity coverage requirement for Credit 

Institutions (LCR). 

30   Commission  Delegated  Regulation  2016/2251  supplementing  European  Market  Infrastructure  Regulation 

(“EMIR”) No 648/2012 

14 

 
                                                 
The  second  regards  prudential  concerns  and  related  risks  to  e.g.  investor  protection.  The 
main problems in this area are the following: 

(1)  misalignment between the fact that EU law does not directly lay down the structural 
characteristics  of  the  product,  which  mostly  derive  from  national  law,  and  the 
favourable treatment granted to investments in covered bonds at EU level;  
inadequate current capital preferential treatment envisaged in art 129 CRR; 
ongoing financial innovation which could pose threats in terms of investor protection. 

(2) 
(3) 

2.2.1.  Untapped CMU potential 

This  section  outlines  how  markets  are  unevenly  developed in  terms  of  issuance,  the  limited 
range of investors, and the limited range of cross-border investments both within the Single 
Market and beyond.   

Unevenly developed markets 

Covered  bonds  are  unevenly  developed  across  the  EU  as  shown  in  tables  1  and  2.  Covered 
bond issuance is dominated by a few Member States. Approximately 80% of global covered 
bond issuance is represented by six Member States (Denmark, France, Germany, Italy, Spain 
and Sweden). The four largest outstanding markets (Germany, Denmark, France, and Spain) 
accounted for almost two-thirds of the EU market in 2015. At the same time, nine Member 
States do not have any covered bond markets.  

Table 1 – Uneven development of covered bond markets 

Member State 

Legal framework 

Compliance with 
EBA Best Practices 

Active market  

AT 
BE 
BG 
HR 
CY 
CZ 
DE 
DK 
EE 
EL 
ES 
FI 
FR 
HU 
IE 
IT 
LT 
LV 
LU 
MT 
NL 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
  
 
 
  
  
  
  
 
  
  
  
  
  
  
  
 
 
  
 
  

Low 
Medium 
NA 
NA 
Medium 
Low 
Medium 
High 
NA 
High 
Medium 
High 
High 
NA 
Medium 
Medium 
NA 
NA 
Low 
NA 
High 

15 

Size  of  the  market  
(relative  to  total 
EU market) 
Medium 
Medium 
NA 
NA 
Small 
Medium 
Large 
Large 
NA 
Small 
Large 
Medium 
Large 
Small 
Medium 
Large 
NA 
NA 
Small 
NA 
Medium 

 
 
 
 
 
 
 
 

PL 
PT 
RO 
SK 
SI 
SE 
UK 
Source: Commission Services elaborations based on EBA (2016) and ECBC Fact Book (2016). 
Legend: Small < €10 bn, Medium < €100 bn, Large > €100 bn. 
*After recent amendments, Romanian framework can be considered highly compliant with EBA best practices. 

Medium 
Medium 
High* 
Low 
Medium 
Medium 
High 

Small 
Medium 
NA 
Small 
NA 
Large 
Large 

  
  
 
  
 
  
  

The uneven development of covered bond markets is also apparent if one compares the size of 
national covered bond markets with the size of national banking sectors (see table 2). In 19 
out of 28 Member States this ratio is below 4.4% (the EU average), while in three the ratio is 
at or above 10% (Denmark, Sweden and Spain).31   

Table 2 – Ratio of outstanding covered bonds / banking assets (2015) 

EU country 

Ratio CB/ bank 
assets 

Total CB outstanding 
(EUR mln, 2015) 

Total banking assets 
(EUR mln, 2015) 

Denmark 
Sweden 
Spain 
Portugal 
Finland 
Slovakia 
Czech Republic 
Austria 
Germany 
France  
Italy 
Ireland 
Hungary 
Netherlands 
Belgium 
United Kingdom 
Greece 
Luxembourg 
Cyprus 
Poland 
Bulgaria 
Estonia 
Croatia 
Latvia 
Lithuania 

37,4% 
17,3% 
9,9% 
7,8% 
6,1% 
6,1% 
5,6% 
5,3% 
5,0% 
4,0% 
3,3% 
3,0% 
2,7% 
2,5% 
1,6% 
1,3% 
1,3% 
1,0% 
0,7% 
0,3% 
0,0% 
0,0% 
0,0% 
0,0% 
0,0% 

383.124 
221.990 
280.888 
34.961 
33.974 
4.198 
11.656 
44.965 
384.414 
323.072 
130.535 
32.305 
3.022 
61.101 
16.905 
121.268 
4.961 
10.166 
650 
1.266 
0 
0 
0 
0 
0 

1.024.778 
1.281.511 
2.828.440 
450.063 
556.050 
69.104 
206.630 
854.229 
7.665.206 
8.150.044 
3.919.502 
1.086.843 
112.408 
2.430.643 
1.073.501 
9.355.722 
386.025 
1.002.760 
91.020 
394.333 
48.585 
23.240 
57.879 
31.932 
24.783 

31   Among the countries where the ratio is significantly below EU average or the market is not developed at all, 
there are MS with different banking structures: we find both countries where typically the banking sector is 
foreign-owned and countries where there is a strong domestic banking sector. This would suggest that the 
uneven development of covered bond markets is not related to the ownership structure of the banking sector. 

16 

 
 
                                                 
Malta 
Romania 
Slovenia 

0,0% 
0,0% 
0,0% 

0 
0 
0 

47.397 
92.288 
41.603 

EU 
Source: Commission Services estimates. 

4,4% 

2.105.421 

43.306.519 

Another way to look at the uneven development of covered bond markets in relative terms is 
to consider the ratio between covered bonds outstanding and residential mortgages in different 
countries.  While  the  EU  average  is  30%,  there  is  a  lot  of  variability  across  countries  with 
Denmark at 100% and Poland at 1.4%.   

The reasons why covered bonds developed in some Member States and not in others is partly 
due to history. The instrument was created decades ago (in some cases even centuries ago, as 
in  Denmark  and  Germany  it  is  around  200  years  old)  and  has  grown  gradually  over  time. 
There are several factors which underpin the development of covered bond markets. Some of 
them  are  of  a  macroeconomic32  and  structural  nature33.  There  are,  however,  important 
regulatory factors that play a crucial role in the development of covered bond markets. They 
include:  

i. 

ii. 

the existence of an enabling regulatory framework that commands confidence among 
investors; and 
broader  regulatory  elements  related 
the 
to 
enforceability of collateral, including foreclosure processes and legal aspects of asset 
transfer.  

insolvency  framework  and 

the 

The  lack  of  a  legal  framework  in  Member  States  characterised  by  underdeveloped  covered 
bond markets in principle confirm the importance of regulatory factors. However, the cases of 
countries  with  legal  frameworks  in  place,  but  no  active  covered  bonds  market  (see  table  1) 
could also suggest that other  factors play a significant role.  As outlined above,  a legislative 
framework for covered bond is indeed in place in six of the nine Member States that do not 
have covered bond markets. As also outlined, the framework is in most instances outdated and 
not  able  to  support  a  properly  functioning  market.34  Some  economic  factors  might  help 
explain  the  lack  of  urgency  in  dealing  with  regulation.  For  example,  countries  with  non-
existent  or  very  small  covered  bond  markets  are  usually  characterized  by  a  lack  of 
diversification  in  banks'  funding  sources.  In  many  Central  and  Eastern  European  countries, 
banks  mainly  rely  on  deposits  for  their  funding35.  The  abundance  and  availability  of  bank 
deposits makes the need to find alternative funding sources less compelling.  

However,  there  are  several  reasons  why  this  situation  is  not  sustainable  in  the  longer  term. 
First,  banks  with  a  broad  and  diversified  range  of  funding  tools  are  more  resilient,  as 
recognised by the IMF (2013) and the BIS (2013)36. In times of crisis, covered bonds allow 
banks  to  continue  access  funding  markets,  as  was  evident  during  the  financial  crisis, 

32   In  particular,  factors  predicting  demand  for  residential  housing,  including  level  of  per  capita  GDP, 

unemployment, inflation and credit demand. 

33   Factors related to the level of development of financial markets, in particular of bond markets, and to the 
level of development of the banking sector, in particular the degree to which funding is needed outside the 
deposit-based system and the demand of funding by end-users to purchase properties. 

34   BG, CY, LT, LV, SI. Romania has just finalised a new legal framework.  
35   In  BU,  HR,  EE,  LT,  LV,  RO,  SI,  mortgages  are  100%  financed  through  deposits.    In  HU,  PL  and  SK, 

covered bonds finance only a small portion of mortgages (in PL this is less than 1%).  

36   Van Rixtel and Gasperini, 2013 (BIS Working Paper 406). 

17 

 
 
                                                 
especially in some peripheral European countries. For many banks most notably from Spain, 
Italy,  Greece,  Ireland  and  Portugal,  this  instrument  became  the  main  source  of  long-term 
wholesale  funding,  as  their  access  to  unsecured  markets  was  partially  or  fully  closed  (Van 
Rixtel and Gasperini, 2013). Secondly, in normal times, in order to finance growth in banks' 
balance sheets, banks need other sources of funding than deposits. Deposits indeed can grow 
only up to a certain limit and, at the same time, they need to be financed through more capital, 
while  covered  bonds  have  lower  capital  and  liquidity  requirements.  Finally,  from  the 
investing bank's point of view, covered bonds can be used as liquid assets to meet liquidity 
requirements (for example in the LCR).  

Nevertheless, covered bonds also present some risks. One of the main risks resulting from a 
significant  growth  in  covered  bond  markets  is  asset  encumbrance  i.e.  assets  specifically 
pledged to pay for certain liabilities. However, according to the EBA (2017), the level of asset 
encumbrance  in  Member  States  where  covered  bond  markets  do  not  exist  or  are 
underdeveloped is low at the moment (ranging between 0% and 10%)37.    

Undertaking  a  process  of  updating  the  existing  legislation  requires,  however,  specific 
expertise  and  collaboration  between  different  institutional  actors  including  the  ministry  of 
finance  and  the  supervisors.  This,  along  with  the  non-urgency  of  the  bank  funding 
diversification  in  some  Member  States,  explains  why  some  of  them  did  not  embark  in  the 
process. Other Member States are doing it with the help of the EBRD (EE, HR, LT, LV, PL, 
RO, SK)38. In Poland, for example, where the ratio of deposit to loans was 94% at the end of 
201639, the planned total asset growth for 2017 is 15% (EBA, 2017) and the planned deposit 
growth 18%. However, planned deposit growth rates are not always met40 and even a small 
negative  deviation  from  the  planned  target  could  hit  lending  and  economic  growth 
significantly.  For  similar  reasons,  in  Slovakia  CB  legislation  has  been  recently  amended41. 
The EBRD itself and most Member States consider having a framework at EU level in place 
an  important  blueprint  on  which  modelling  their  legislation.  According  to  the  EBA,  three 
Members  States  (AT,  ES,  IE)  have  informed  that  they  intend  to  wait  for  the  Commission's 
conclusions  before  taking  any  action.  In  another  9  jurisdictions  no  changes  to  national 
frameworks have been introduced (BE, CY, DK, FI, IT, LU, PT, SI, UK). Also in those cases, 
the expectation of EU action has played a role in postponing any adjustment. 

There is also another dimension of the uneven development of covered bond markets which 
relates to economies of scale and the size of issuers. Covered bonds are mainly issued by large 
banks, as setting up programs entails high upfront costs. Moreover, liquidity is important in 
covered bond markets42  and the latter is largely determined by a certain minimum volume of 
bonds outstanding. Smaller transactions are possible although they typically require a higher 
coupon to reflect the lack of liquidity. This explains why issuing covered bond is currently a 
business mainly for large banks, as illustrated by the large size of covered bond issuers across 
the EU (on average above EUR200 bn). As a consequence, the benefits of covered bonds are 
currently often beyond the reach of smaller banks.  

37   For more details on the risks of asset encumbrance, see section 5.3.2 on Indirect Costs (p. 60) 
38   A covered bond market in PL has already developed. Legislation in RO has only recently been finalized. In 

EE, HR, LT, LV and SK the project is on-going. In EE, LT, LV the framework will be common. 

39   As a matter of comparison: in DE this ratio was 81%, in IT 86%, in Denmark 32% (IMF data). 
40   In Poland the planned deposit growth rate for last year was 8% and the actual one has been 5%. 
41   In Slovakia the deposit to loan ratio was 106% at the end of 2016, while the planned growth in bank assets is 

18%. 

42   For example, covered bond indices typically only include bonds with at least €500mn outstanding. Another 

example: the eligibility for ECB repo operations is frequently size dependent. 

18 

 
                                                 
Undiversified investor base 

The  main  investors  in  covered  bonds  are  banks  and  central  banks  (see  section  2.1.1).  The 
limited  uptake  from  other  financial  institutions  (e.g.  insurance/pension/asset  managers)  is 
problematic from a CMU perspective, as it limits these firms from channelling funds to banks 
and through them to the real economy. The situation was different in the recent past. As figure 
4  above  shows,  before  2013  the  combined  share  of  investors  other  than  banks  was 
significantly  higher.  It  has  since  declined,  largely  due  to  lower  yields  resulting  from  ECB 
purchasing programs. These have reduced the incentives of asset managers, pension funds and 
insurance companies to invest in covered bonds. This effect has been reinforced by the limited 
size of the market in some Member States and by fragmentation across the euro area. The lack 
of  diversification  also  leads  to  prudential  concerns,  in  terms  of  increased  concentration  of 
risks.  If  covered  bonds  end  up  being  mostly  acquired  by  other  banks,  this  does  not  bring 
additional liquidity to the sector and concentrates credit risks within the sector itself, creating 
interconnectedness.  It  is  therefore  important  to  diversify  the  investor  base  in  light  of  the 
temporary  nature of the ECB's involvement, future financing needs of banks  and to address 
prudential concerns.  

Untapped potential for investments across the Single Market 

There is an untapped potential for further development of cross-border investments across the 
EU  single  market.  While  cross-border  investment  in  covered  bond  markets  across  the  EU 
currently  represents  60%  of  total  covered  bond  investments,  this  figure  needs  to  be  better 
qualified43. Not only it overstates the cross border activity in the EU, but also the bulk of such 
investments  come  from  countries  with  a  strong  covered  bond  tradition  (e.g.  Germany  and 
Nordic  countries).  Germany  is  particularly  dominant,  accounting  on  average  for  37%  of  all 
cross-border  investments  of  which  most  go  to  Nordic  countries.  Finally,  the  most  part  of 
cross-border investments takes place across countries with similar covered bond and mortgage 
legislations (for example Nordic countries typically invest in other Nordic countries). All this 
leaves  an  untapped  potential  in  terms  of  cross-border  investments.  Fulfilling  this  potential 
through a broader harmonized market would be important for issuers aiming at expanding the 
markets for selling their covered bonds both within and outside the Union. It would also be 
important for investors wanting to geographically diversify their portfolios.. 

In  the  context  of  the  public  consultation  conducted  by  the  European  Commission  between 
2015 and 2016, many respondents confirmed that cross-border investment in covered bonds is 
“already  taking  place”,  but  many  (insurers,  investors,  public  authorities  including  the  ECB) 
underlined  that  it  faces  significant  legal  or  practical  obstacles.  Among  them,  a  commonly 
highlighted issue referred to differences in legal frameworks which require prospective buyers 
to invest more in credit analysis and legal research. This may partly explain why the investor 
base remains home-biased and concentrated in markets with similar regulatory frameworks.44 

43   This the average share in the EU of non-domestic investments (including extra-EU) in the primary market 
only in relation to covered bonds included in the IBOXX index (including the most tradable covered bonds 
with minimum issuance of EUR 500 million). It only considers the existing markets and in particular  AT, 
DE, DK, FI, FR, IE, IT, NL, NO, PT, ES, SE, UK. Excluding countries where covered bond markets do not 
exist or are under developed, the figure overstates the cross border activity in the EU. The actual figure for 
the whole EU could be significantly lower and would therefore not represent a satisfying benchmark for a 
wholesale market. 

44   For  example,  an  important  obstacle  to  cross-border  investments  is  indeed  the  fact  that  bonds  issued  in 
different EU jurisdictions do not provide the same degree of investor protection. This is reflected by ratings 
which differ not only for the rating of the issuer and of the country, and for the quality of the cover pool, but 

19 

 
                                                 
Certain  respondents  suggested  that  harmonisation  could  encourage  and  facilitate  additional 
cross-border  investment.  The  ECB,  in  responding  to  the  public  consultation  on  the  CMU 
MTR, manifested concern for the low comparability of covered bonds across Member States 
and fragmentation in the markets, showing support towards an EU covered bond harmonized 
framework and the EBA's recommendations to that effect. 

Another  aspect  of  the  cross-border  dimension  is  the  existence  of  cross-border  cover  pools 
which could help lending across countries. Cross border cover pools allow lowering country 
risk  concentration.  This  could  help  countries  that  do  not  currently  have  developed  covered 
bond markets and where the small scale of mortgage operations may necessitate cross-border 
cover  pools  to  achieve  critical  mass45.  Nonetheless,  cross-border  cover  pools  remain  very 
limited. Of 125 programmes rated by Fitch, only 21 included assets from jurisdictions other 
than the one in which the issuer was based. This minority represents EUR 70.3 billion, or 3.2 
per cent of the  outstanding European covered bond  market. Most were concentrated in  four 
Member  States  (DK,  FR,  DE,  and  LU).  Many  respondents  to  the  Open  Public  Consultation 
highlighted  that  there  are  significant  legal  or  practical  barriers  to  cross-border  cover  pools. 
For  example,  only  a  few  jurisdictions  have  developed  rules  catering  for  this  situation,  e.g. 
specifying valuation methodologies for loans in other countries.  

Limited third-country investments 

The  lack  of  a  European  covered  bond  regulatory  framework  might  also  hamper  investment 
from third countries, as investors from outside the bloc do not have a comprehensive basis for 
comparison  with  the  covered  bond  framework  of  their  home  jurisdiction.  Currently, 
investments  from  outside  the  EU  represent  a  small  share  of  the  market  as  only  11%  of  EU 
issued covered bonds are held outside the EU (ICF, 2017)  compared to  16.5%  of total debt 
securities  (Commission  estimates).  This  illustrates  that  covered  bonds  are  underrepresented 
among  investments  from  outside  the  EU.  This  issue  will  become  more  important  in  the 
medium term when the ECB support programmes will eventually come to an end. More third-
country  investments  would  help  maintain  good  funding  conditions  for  European  banks.46 
However, it is unlikely that those kinds of investors will invest time and resources to perform 
due  diligence  of  the  different  characteristics  of  more  than  25  non-harmonised  national 
regimes. 

Moreover,  in  absence  of  an  EU  harmonized  framework  it  is  also  difficult  to  establish 
equivalence  between  jurisdictions  and  therefore  allow  for  reciprocal  recognition  of 
preferential treatment. This could hamper foreign investors' interest in EU covered bonds and 
limit EU investors' range of interesting investment choices.  

2.2.2.  Prudential concerns 

There are also prudential concerns associated with the preferred treatment enjoyed by covered 
bonds, given that EU law does not comprehensively define what covered bonds are and much 
is left to national legislation. As a result, the preferential treatment may be accorded to very 
different  products  depending  on  the  Member  State in  question.  Furthermore,  where  EU  law 

also  for  the  different  level  of  investor  protection  and  the  different  degree  of  pool  transparency  of  each 
jurisdiction.  
45   EBRD (2017) 
46   Some EU covered bonds (for example German Pfandbrief) enjoy very good reputation also outside the EU 
and  their  level  of  safety  is deemed  similar  to  sovereign bonds.  Covered  bonds  of  a good  quality have  the 
characteristics to be purchased by central banks and other conservative investors e.g sovereign wealth funds. 

20 

 
                                                                                                                                                         
exists it may not fully address potential risks related to covered bonds (CRR) or may not have 
stood  the  test  of  time  in  terms  of  financial  innovation  or  regulatory  developments,  e.g.  as 
regards  state  aid  and  resolution.  This  section  further  outlines  those  concerns.  At  the  same 
time, it is commonly recognized that covered bonds performed well during the financial crisis. 
This should not give ground to complacency47, also taking into account the exceptional state 
support granted to the banking sector during the crisis. In forming a view on how the existing 
prudential  rules  perform,  the  Commission  services  have  drawn  on  a  variety  of  sources, 
including  the  two  reports  issued  by  the  EBA  in  2014  and  2016  as  well  as  views  expressed 
during the public consultation.  

Diversity  in  national  covered  bond  frameworks  and  risk  of  misalignment  with  preferential 
prudential treatment  

As seen in section 2.1.2, the only piece of EU legislation that defines a covered bond is art. 52 
UCITS. However, this provision was not conceived for this broader purpose in mind, but was 
rather focused on extending the limit on investment concentration in some product offerings 
(including  those  that  contain  covered  bonds)  that  were  considered  of  higher  quality.  The 
UCITS definition in  Article 52(4) has  therefore never been intended  to serve as  the general 
definition  of  covered  bonds  as  a  financial  instrument,  but  to  ensure  an  appropriate  level  of 
protection  to  investors  investing  in  UCITS  compliant  funds48.  From  this  perspective,  the 
UCITS  definition  contains  only  a  few  provisions  for  a  debt  instrument  to  be  considered 
covered bond namely: i) the nature of the issuer; ii) the dual recourse principle; and iii) the 
special  public  supervision.  It  does  not  develop  detailed  provisions  to  define  other  structural 
features of covered bonds and is therefore not suitable to be considered a proper definition for 
an instrument having such a significant size and importance for the EU banking sector. Over 
time, covered bond instruments have further developed and contain elements that go beyond 
the narrow definition in UCITS. For instance, some covered bonds have extendible maturity 
structures such  as  the soft-bullet and conditional pass  through, while others contain specific 
provisions  on  liquidity  buffers  or  composition  of  the  cover  pool.  These  aspects  are  not 
captured by the existing provisions in UCITS. Instead, the structural characteristics of covered 
bonds  are  mainly  defined  in  national  legislations.  This  leads  to  a  large  diversity  of  covered 
bonds instruments across the EU.  

The EBA documents the current diversity in the national covered bond frameworks in legal, 
regulatory  and  supervisory  terms.  While  there  are  similarities  (e.g.  related  to  dual  recourse 
and  the  coverage  principle),  there  are  variations  in  the  frameworks  in  the  area  of  special 
public  supervision  as  well  as  in  relation  to  the  disclosure  of  data,  liquidity  buffers, 
composition of  the cover  pool, and stress testing. In  light of these  differences, action at EU 
level may be necessary in order to ensure that the favourable treatment extended to covered 
bonds in EU legislation rests on solid ground. 

For example, in relation to public supervision, the EBA finds differences across the EU in the 
content and level of detail regarding the rules on special public supervision, scope of duties 

47   It should also be noted that even if no covered bond defaulted during the crisis, there have been problems in 
the market. For example, selling the cover pool turned out to be longer and more difficult than expected in 
many Member States. In Spain, it took on average three years to sell assets of the cover pool. We cannot 
exclude,  that,  in  the  event  of  a  future  systemic  crisis  and  absence  of  state  bail-out  funds,  the  length  and 
complexity of the selling process would lead to missing payments towards bondholders and defaults. 

48   Over time, given that the covered bond definition in UCITS was the only definition available at EU level, 
several legislations have relied on this definition, e.g. RTS on European Market Infrastructures Regulation 
(EMIR), Solvency II Delegated Regulation and LCR Delegated Regulation. 

21 

 
                                                 
and  the  powers  of  supervisory  authorities  regarding  ongoing  supervision  of  covered  bond 
issuers  and  programmes,  as  well  as  the  rules  on  approval  and  licensing  of  covered  bond 
programmes.  Furthermore,  the  EBA  notes  that  the  divergences  extend  beyond  regulatory 
frameworks  and  are  also  observed  in  actual  supervisory  practices  of  individual  competent 
authorities  in  the  execution  of  special  public  supervision.  The  elements  of  the  regulatory 
framework related to the supervisory model have indeed potential credit impact as confirmed 
by rating agencies.49     

The  EBA  2016  Report  also  shows  that,  since  the  publication  of  the  EBA  Best  Practices  on 
Covered  Bonds  in  2014,  more  than  half  of  the  responding  jurisdictions  (12  out  of  22)  have 
either  not  implemented  any  changes  to  their  covered  bond  frameworks  or  action  is  on  hold 
pending  the  results  of  the  Commission’s  review  of  the  EU  covered  bond  framework. 
Convergence has therefore not  taken place in the recent years during which the process has 
been monitored.  

The  diversity  of  national  frameworks  means  that  covered  bonds  with  diverse  characteristics 
benefit from the same preferential treatment. This may give rise to prudential concerns. 

Preferential capital treatment not adequate (art 129 CRR)  

When adopting the CRR in  2013, the legislators called on the Commission  and the EBA to 
review whether the preferential capital treatment for covered bonds is adequate in light of the 
prudential risks. On the basis of a first report in 2014, the EBA concluded that art 129 CRR 
does not need modifications in terms of inclusion/exclusion of specific cover assets, but is less 
specific  on  equally  relevant  aspects  of  prudential  treatment.  In  a  second  report  in  2016,  the 
EBA recommended that the CRR be strengthened in relation to (i) disclosure requirements for 
the  issuer;  (ii)  rules  on  substitution  assets;  (iii)  Loan-To-Value  limits  for  cover  assets 
collateralised on physical property (i.e. for mortgage cover pools); and, (iv) minimum over-
collateralisation. The EBA also notes that existing provisions on the eligibility of cover assets 
for  the  capital  preferential  treatment  should  be  reassessed.  The  Commission  services  share 
this assessment and  believe that the treatment provided for in  article 129 of the CRR is  not 
adequate and that the conditions for accessing this treatment needs to be strengthened.  

Not addressing new risks resulting from financial innovation 

The combination of EU and national frameworks is inadequately equipped to deal with new 
risks presented by financial innovation. Financial innovation has, for example, prompted the 
increasing  use  of  new  structures,  so-called  Soft-bullet  and  Conditional  Pass  Through  (CPT) 
programmes.  These  aim  to  mitigate  liquidity  risk  through  the  introduction  of  long-term 
maturity  extensions  regarding  repayments  to  bondholders.50  These  kinds  of  extendible 

49   In particular,  Moody's  in  its  evaluation  methodology for covered  bonds  lists  the  following:  qualifications, 
duties and powers of the cover pool monitor; the modalities and scope of the supervision in going concern; 
the  modalities  and  scope  of  the  supervision  in  the  event  of  the  issuer’s  insolvency/resolution;  the 
characteristics,  power  and  duties  of  the  administrator  of  the  covered  bond  programme  post  issuer’s 
insolvency/resolution. 

50   Typically,  covered  bonds  used  to  be  hard bullet  in  the  past  i.e.  they  needed  to  be  repaid  at  the  scheduled 
maturity date. Any delay in the payments would have constituted a default event. Recently, however, more 
flexible  maturity  structures  have  been  introduced  in  the  market  that  allow  for  the  possibility  to  extend 
maturities  and  repay  covered  bonds  to  bondholders  later  than  the  original  scheduled  maturity  date.  In 
particular,  the  extension  of  scheduled  maturities  might  be  12  months  (soft  bullets),  but  can  also  be 
"conditional  pass-through"  (CPT)  where  the  new  final  maturity  date  is  set  on  the  basis  of  the  maximum 
maturity date of the cover pool assets which could translate in an extension of up to 30 years. The triggers 

22 

 
                                                 
structures  may  involve  a  higher  level  of  complexity,  incorporate  non-uniform  features  and 
introduce changes to the structural characteristics of the product, as the EBA recognizes. The 
new structures may pose new risks to investors in terms of liquidity. These risks may not be in 
line with the current preferential treatment.51   

Evidence suggests that covered bonds containing these new features so far represent a relative 
limited  share  of  the  overall  market  for  outstanding  covered  bonds.  However,  their  market 
share  is  increasing.52  The  fact  that  these  features  have  increased  structural  diversity  in  the 
covered  bond  market  is  also  the  result  of  how  they  have  typically  been  introduced  –  by 
contractual  terms  –  rather  than  by  regulation.  While,  within  any  given  country,  soft  bullet 
structures seem relatively homogenous, there are differences across jurisdictions.  

that  allow  for  invoking  the  extension  may  vary  and  can  be  at  the  discretion  of  the  issuer  or  upon  certain 
defined events, e.g. non-payment on the scheduled maturity date. 

51   For example, the UCITS definition is not able to capture these aspects of maturity extension, as it contains 
no  detailed  rules  on  the  structural  features  of  covered  bonds,  including  these  aspects.  Therefore,  covered 
bonds  featuring  those  extensions,  despite  their  different  liquidity  risks,  are  considered  as  part  of  the 
traditional covered bond group and as such they enjoy preferential treatment.  

52   There  are  currently  €305  billion  of  soft  bullet  and  €14  billion  of  CPT  outstanding  (only  the  benchmark 
bonds in the iBoxx index are included in these figures). Within this index they represent 41 per cent and 2 
per  cent  of  the  total  of  outstanding  CBs  respectively.  These  percentages  are  increasing over  time  because 
more newly issued covered bonds are in these formats and the number of conversion of existing bonds from 
“hard bullet” to “soft bullet” structures (typically after bond-holder consent solicitations) is increasing. 

23 

 
 
 
                                                                                                                                                         
Figure 7.  Problem tree 

     Drivers 

         Problems 

 Consequences 

Untapped CMU 
Potential: 

Restricted financing and 
investment options, leading 
to reduced capacity of the 
banking sector to finance 
the wider economy 

Prudential concerns: 

Financial risks, market 
integrity and investor 
protection 

Differences in national 
legal frameworks on 
covered bonds and lack 
of frameworks in some 
MS 

-> legal uncertainty and 
informational problems 
for investors 

Unevenly developed 
covered bond national 
markets 

Low diversification of 
investor base 

Untapped potential for 
EU cross-border 
investment 

Low level of investment 
in covered bonds from 
outside the EU 

National frameworks 
defining different 
structural characteristics 
for covered bonds  

Prudential requirements 
not aligned with structural 
characteristics of the 
product: financial risks 

Requirements for 
capital preferential 
treatment not adequate 

Preferential capital 
treatment not adequate: 
prudential concerns 

Financial 
(soft bullets/CPT) 

innovation 

Increased 
financial innovation 

risks  due 

to 

Out-of-scope drivers: 

- ECB covered bonds programme 
- investor and issuer preferences 
- market conditions  
- macroeconomic developments 
- etc. 

24 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.3.  The EU's right to act and justification 

The Treaty on the Functioning of the European Union confers to the European institutions the 
competence to lay down appropriate provisions that have as their objective the establishment 
and functioning of the internal market (Article 114 TFEU).  

The  previous  section  demonstrated  that  covered  bonds  are  unevenly  developed  across  the 
Single Market and that there is an untapped CMU potential. It also highlighted that covered 
bonds are only partially addressed in EU law, which may give rise to prudential concerns. To 
address these two concerns, action at EU level is warranted.   

First, concerning the CMU potential, the EU level is the most effective to address significant 
differences  in  national  regulatory  frameworks,  diverging  practices  in  the  market  and  at 
regulatory  level  by  Member  States,  fragmentation  in  the  Single  Market  and  lack  of 
harmonization  that  hamper cross-border investments. These  problems can  best be tackled at 
EU level.   

Second,  as  regards  prudential  concerns,  these  stem  from  the  fact  that  what  constitutes  a 
covered  bond  is  not  comprehensively  addressed  in  EU  law.  The  only  definition  of  covered 
bonds at EU level is in the UCITS directive. That definition was, however, not drafted with 
this  broader  purpose  in  mind  but  had  a  more  limited  scope  and  is  not  considered  to 
sufficiently ensure convergence of the structural characteristics of the product across the EU 
with  the  level  of  risk  implied  by  the  favourable  EU  treatment.  As  a  result,  covered  bond 
structural  characteristics  are  mainly  defined  at  national  level  and  these  regimes  vary 
significantly.  Harmonising  national 
the  structural 
characteristics  of  the  product  are  the  same  across  the  Single  Market.  EU  action  appears  the 
most effective way to achieve that objective. Also in this second area, problems can therefore 
best be tackled at EU level.   

frameworks  would  ensure 

that 

The Public consultation, the 2016 EBA Report, the resolution of the European Parliament and 
subsequent discussions with  Member States in e.g. the Financial  Services Committee of the 
Council  and  the  European  Commission  Expert  Group  on  Banking,  Payments  and  Insurance 
show  that  stakeholders  in  general  welcome  a  further  harmonisation  in  form  of  a  directive 
building on well-functioning national systems. A directive represents, indeed, the best means 
to  achieve  the  stated  objectives  while  respecting  the  principle  of  subsidiarity.  A  number  of 
Member  States  have  also  put  on  hold  changes  to  national  covered  bond-legislations,  which 
also show that they expect further harmonisation at EU level.  

3.  OBJECTIVES 

In  light  of  the  concerns  outlined  in  the  previous  chapter,  two  general  objectives  will  be 
pursued, which in turn can be articulated into specific objectives: 

  Enhance CMU potential, leveraging banking capacity to support the wider economy: 
a  harmonised  EU  framework  for  covered  bonds  would  enhance  their  use  as  a  stable  and 
cheaper  source  of  funding  for  credit  institutions,  especially  where  markets  are  less 
developed, in  order  to  help  financing  the  real  economy  in  line  with  the  objectives  of  the 
CMU. This would translate into the following specific objectives: 

–  Contribute to the development of covered bonds markets in EU countries where they 
do not exist or are less developed. Expanding the scope of covered bond markets, is 

25 

 
not  only  to  be  intended  from  the  geographical  perspective,  but  also  in  terms  of 
issuers size;  

–  Diversify covered bonds' investor base; 
–  Tap the potential for more cross border investments; and 
–  Attract investors from third countries. 

This  will  be  particularly  important  when  the  ECB  ends  its  covered  bond  purchase 
programme  and  the  monetary  stance  eventually  becomes  less  accommodative.  Credit 
institutions will then be more in need of cheap and long-term sources of funding to finance 
the real economy;  

  Address  prudential  concerns  and  ensure  the  coherence  of  preferential  prudential 
treatment:  national  frameworks  need  to  be  strengthened  and  harmonised  in  order  to 
ensure that the preferential treatment provided for under EU legislation is aligned with the 
level of risk implied by the structural characteristics of the instrument. This would translate 
into the following specific objectives: 

–  Define  the  structural  features  of  covered  bonds  in  EU  law  in  order  to  align  the 
structural  characteristics  of  covered  bonds  across  the  EU  with  the  risk  features 
underlying the EU preferential treatment; 

–  Strengthen the requirements for benefitting from preferential capital treatment under 

the CRR; and 

–  Define  a  framework  for  newly  developed  liquidity  structures  (Soft-bullets  and 

Conditional Pass-Through (CPT) programmes).  

Table 3 – Intervention logic diagram 

Problems and consequences 
Consequence 1  
Untapped  CMU  potential  –  Restricted  financing 
and investment options, leading to reduced capacity 
of banking sector to finance the wider economy. 

Objective 
General Objective 1 
Enhance  CMU  potential  -  Leveraging  banking 
capacity to support the wider economy. 

  Problem 1: Unevenly developed national 

  Specific objective 1: contribute to develop 

markets 

  Problem 2: undiversified investor base  
  Problem 3: Obstacles to cross border 

investments  

covered bond markets in all EU countries 
  Specific objective 2: diversify investor base  
  Specific objective 3: tap the potential for 

more cross border investments  

  Problem 4: Low levels of investments 

  Specific objective 4: attract investors from 

from outside the EU  

outside the EU  

Consequence 2  
Prudential  concerns  –  Financial  risks,  market 
integrity and investor protection 

General Objective 2 
Ensure  the  coherence  of  EU  prudential  regulation 
with the structural characteristics of covered bonds 

  Problem 1: diversity in national covered 

  Specific objective 1:  

Define the 

bond frameworks and risk of misalignment 
between EU preferential treatment and risk 
characteristics of covered bonds 

structural features of covered bonds in EU 
law in order to align the structural 
characteristics of covered bonds across the 
EU with the risk features underlying the EU 
preferential treatment 

  Problem 2: requirements for capital 

  Specific objective 2: strengthen the 

preferential treatment not adequate 

requirements for benefitting from preferential  
capital treatment in CRR (art 129) 

  Problem 4: increased risks due to financial 

  Specific objective 4: define a framework for 

26 

 
innovation (soft bullets and CPTs) 

new liquidity structures 

4.  OPTIONS 

This  section  will  examine  the  policy  options  available  to  achieve  the  above  objectives.  The 
baseline scenario consists of the current status quo (i.e. no action). There will then be a range 
of options that differ in terms of intensity of harmonisation, spanning from a non-regulatory 
option to options involving full harmonisation. More specifically: 

  Baseline: do nothing; 
  Option 1: Non-regulatory option; 
  Option 2: Minimum harmonisation based on national regimes; 
  Option 3: Full harmonisation replacing national regimes; or 
  Option 4: 29th regime operating in parallel to national regimes. 

The four options listed above will all be assessed in the following. In addition, the final part of 
this section outlines an option (adjusting the preferential prudential treatment) that has been 
discarded  as  it  would  significantly  disrupt  existing  markets  and  lacks  any  stakeholders' 
support.  

This section explores the main advantages and disadvantages of the options listed above. For 
ease  of  reference,  the  following  policy-option  matrix  (table  4)  summarises  each  of  the 
available options (rows) along with the related policy areas to be addressed (columns). Each 
cell  specifies  the  level  at  which  each  area  will  be  settled.  The  first  column  is  about  the 
structural  characteristics  that  a  covered  bond  must  have  (for  example  dual  recourse, 
segregation of cover assets and bankruptcy remoteness of the cover pool). The second column 
is about what assets should be allowed in the cover pool (especially in terms of traditional vs 
non-traditional assets). The third column is  about how covered bonds  should  be supervised. 
Such "special public supervision" is another fundamental characteristic of covered bonds. The 
fourth column is about whether or not EU covered bonds should be granted a label. The fifth 
column  is  related  to  the  preferential  treatment  that  covered  bond  investors  enjoy  under  EU 
law (cfr section 2.1.2). The sixth column is related to transparency requirements. Finally, the 
last column concerns all the other technical aspects spanning from overcollateralization levels 
to  cover  pool  derivatives  and  liquidity  risk  mitigation  tools.  Each  of  the  four  options 
considered  will  cover  all  the  policy  areas  in  the  columns  with  a  different  degree  of 
harmonisation. 

Table 4 – Policy-option matrix 

Structural 
features  
a) 

Cover 
pool  
b) 

Supervision  

Label 

c) 

d) 

Preferential 
treatment  
e)  

National 

National 

Market 

EU 

Transparency  

f) 

Market  

Technical 
aspects  
g) 

National 

National 

National 

Market 

EU  

Market  

National 

Baseline 

Option 1 

Option 2  

Mainly 
national 

Mainly 
national 
EU  

National 
and EU 

National + 
basic EU rules  

Option 3 

EU only 

EU 

National/SSM + 
detailed EU 

EU revised/ 
strengthened  

EU revised/ 
strengthened 

EU 

EU 

27 

EU  

EU 

Principles at 
EU level + 
details at 
national level 
Principles + 
details at EU 

 
 
 
 
 
 
Option 4 

EU 
(national 
for parallel 
regimes) 

EU 
(national 
for 
parallel 
regimes) 

rules  
National/SSM + 
detailed EU 
rules  

EU 

EU revised/ 
strengthened 

EU  

level 
Principles + 
details at EU 
level (national 
for parallel 
regimes) 

In  designing  these  options,  the  Commission  services  have  taken  due  account  of  the  views 
expressed by various stakeholders and in particular the 2016 advice of the EBA and the 2017 
report of the European Parliament.  

The EBA advice 
In  their  2016  Report,  the  EBA  suggests  a  ‘three-step  approach’  to  the  harmonisation  of 
covered bond frameworks in the EU: 

(1) 

(2) 

(3) 

Step  I:  develop  a  principle-based  covered  bond  framework,  which  would  aim  to 
provide  a definition  of the covered bond product  as  an instrument recognised  by the 
EU  financial  regulation  (implementation  via  directive  is  recommended).  This  would 
be the central point of reference for prudential regulation purposes; 
Step II: targeted amendments to the CRR provisions on covered bonds, which would 
aim  to  enhance  conditions  for  the  access  to  preferential  risk  weight  treatment  of 
covered bonds;  
Step  III:  use  of  non-binding  instruments  with  a  view  of  stimulating  voluntary 
convergence between national frameworks in specific areas considered less critical in 
terms of alignment with preferential prudential treatment, and, at the same time, also 
the most controversial among Member States.  

Overall,  the  EBA  approach  is  advocating  for  minimum  harmonisation.  The  EBA  approach 
intends to be principle based and to build on the strengths of the existing national frameworks, 
while,  at  the  same  time,  ensuring  more  consistency  in  terms  of  definition  and  regulatory 
treatment  of  covered  bonds  in  the  EU.  It  should  however  be  noted  that  some  stakeholders, 
including  Member  States,  have  expressed  the  view  that  the  2016  EBA  report,  in  some 
instances, goes beyond the advocated principle-based approach and gets into a high level of 
details on some issues (e.g. liquidity requirements). 

The EP Report 
Overall, the EP Report shares the EBA approach to covered bond harmonization, except for 
some elements. For example, the EP report proposes a common definition of covered bonds 
based  on  two  labels:  some  covered  bonds  would  become  Premium  Covered  Bonds  (PCBs) 
and others would remain  Ordinary Covered  Bonds (OCBs).  In  addition, the Parliament also 
proposes  to  create  a  new  category  of  covered  bonds  to  be  named  European  Secured  Notes 
(ESNs) based on SMEs loans or non-government-backed infrastructure loans.  

4.1.  Baseline: do nothing 

The baseline scenario implies no action at EU level. The structural features of covered bonds 
would  therefore  continue  to  be  regulated  mainly  at  national  level  with  the  exception  of  the 
few  elements  imposed  by  the  UCITS  Directive (Art.  52).  The  current  preferential treatment 
would remain in place. The Best Practices published in 2014 by the EBA would continue to 
serve as a reference point for the coordination of Member States regulations, but they would 
remain voluntary. The industry could continue or intensify its ongoing initiatives of voluntary 

28 

 
 
 
standardization. While the definition of an industry-led EU covered bond label is already in 
place  in  relation  to  transparency  requirements  (see  work  of  European  Covered  Bond 
Council53), in the future the industry could provide standardisation also in the field of defining 
market  standards  for  new  maturity  structures.  Another  market  push  in  the  direction  of 
harmonisation could come from credit rating agencies' requirements as issuers tend to comply 
with them to get better ratings.  

Under this scenario: 

a)  Structural features: The structural features of covered bonds would remain regulated 

at national level;  

b)  Cover  pool:  The  cover  pool  would  remain  regulated  at  national  level.  However,  for 
covered bonds eligible for capital preferential treatment, assets are explicitly listed in 
art 129 CRR; 

c)  Supervision: The characteristics of the supervision model would remain regulated at 

national level;  

d)  Label: The labelling process would be market-driven; 
e)  Preferential treatment: Preferential treatment would remain regulated at EU level in 

different pieces of EU law (see section 2.1.2); 

f)  Transparency:  Transparency  requirements  would  remain  mainly  market  driven. 
However,  for  covered  bonds  eligible  for  capital  preferential  treatment  under  article 
129  CRR,  transparency  requirements  would  remain  explicitly  listed  in  the  same 
article; and 

g)  Technical aspects: Other technical aspects would remain regulated at national level. 

Under the baseline scenario, covered bonds issuance is expected to increase in the short term. 
According to a survey by the EBA, EU banks indeed plan to increase covered bond issuance 
in 2018 and 2019 after below average supply in 2017.54 However, this only affects the largest 
and  established  EU  covered  bond  markets.  Substantial  increases  compared  to  2017  of  the 
order of 50% are expected in Sweden, Germany, Denmark, France, Italy and Spain. The main 
driver is the expectation of increase in overall debt issuance in the banking sector for the next 
couple  of  years.  The  latter  is  due  to  the  winding  down  of  central  bank  funding  and  to 
improved economic conditions. According to Credit Agricole analysis, spreads are expected 
to widen by around 20-30bp on the back of tapering.  

In relation to the main problems identified in section 2.2, under the baseline we would expect: 

  CMU potential – Problem 1: a few countries with no legislation in place would undertake 
legislation in line with EBA best practices. It is unlikely that all countries would comply 
with EBA best practices, as empirical evidence has already shown. Even if issuance in the 
largest and well-established market is expected to increase compared to 2017 (see above), 
no uptick in issuance is expected in less developed markets.    

  CMU  potential  –  Problem  2:  the  increase  in  yields  of  around  20-30bp  on  the  back  of 
tapering (see above)  would  likely have  the effect of attracting investors other than banks 

53   The  European  Covered  Bond  Council  (ECBC)  is  the  platform  that  brings  together  covered  bond  market 
participants including covered bond issuers, analysts, investment bankers, rating agencies and a wide range 
of  other  interested  stakeholders.  The  ECBC  currently  has  over  100  members  across  more  than  30  active 
covered bond jurisdictions globally. The ECBC represents over 95% of covered bond issuers in the EU. 
54   EBA (2017). The EBA survey is based on a sample of 155 banks from all EU countries asking about their 

funding plans for 2017-2019.  

29 

 
                                                 
such as insurers and asset managers. The latter have partly retreated because of the ECB 
purchasing  programmes  and  should  find  it  easier  to  recover  their  demand  should  the 
CBPP3 step back and the yields widen thus proving more attractive for them.    

  CMU potential – Problem 3: no significant changes are expected in this respect and the 
cross-border  activity  is  expected  to  remain  the  same  and  taking  place  mainly  between 
countries with similar jurisdictions (see section 2.2).     

  CMU  potential  –  Problem  4:  no significant  changes  are expected  in this  respect.  In  the 
absence of any EU regulatory framework for covered bonds, it would be difficult to assess 
equivalence with third country regimes. This would hamper investments by third countries. 
It  would  also  restrict  the  choice  for  investors  based  in  the  EU.  Moreover,  the  increased 
issuance  coupled  with  the  likely  reduction  or  ending  of  the  ECB  CBPP3  could  cause 
difficulties for issuers in placing their issuance on the market.  

  Prudential  concerns  –  Problem  1:  the  process  of  harmonisation  would  not  necessarily 
take place or would take place only slowly, mainly driven by market forces. In some areas, 
a process of divergence could be envisaged for example in relation to market innovations. 
This  could  increase  prudential  concerns  associated  with  the  preferential  treatment,  the 
conditions  of  which  would  remain  unchanged.  This  could  undermine  the  international 
credibility  of  EU  covered  bonds.  An  eventual  reduction  of  preferential  treatment  would 
imply costs to the market (see section 4.6). 

  Prudential concerns – Problem 2: the inadequacy of requirements for capital preferential 
treatment under art 129 CRR could undermine the international credibility of EU covered 
bonds.  An  eventual  reduction  of  preferential  treatment  would  imply  costs  to  the  market 
(see section 4.6). 

  Prudential concerns – Problem 3: the proliferation of market innovations might lead to 
increased  divergence across Member States.  For example, the increase in the issuance  of 
soft bullet and CPT could replace the whole market in some countries and not in others (in 
Germany all issuance is hard bullet whereas other jurisdictions such as Italy currently only 
issue  soft  bullets).  This  would  widen  differences  across  Member  States  in  terms  of  the 
structural  characteristics  of  the  product  and  make  the  rationale  for  preferential  treatment 
still more difficult to defend. 

4.1.1.  Advantages 

The  baseline  would  imply  no  disruption  of  the  status  quo  and  no  costs  of  adaptation  and 
transition. Member States would retain their own models and related specificities. This would 
help preserving the functioning of at least those markets already working well. In the absence 
of EU action, market bodies might try to regulate the market themselves (e.g. by developing 
further  standardisation  practices).  In  addition,  in  the  absence  of  EU  action,  Member  States 
might also change their laws to conform to EBA best practices. At the same time, credit rating 
agencies could induce issuers to comply with international standards (e.g. EBA best practices) 
independently of national rules.  

4.1.2.  Disadvantages 

Voluntary  convergence  is  no  guarantee  of  effective  and  coherent  harmonization.  Moreover, 
market-based  voluntary  arrangements  aimed  at  harmonising  certain  market  practices  in  the 
form  of  self-regulation  are  unlikely  to  constitute  a  sufficiently  robust  basis  for  maintaining 
over  time  the  preferential  prudential  treatment  currently  conferred  on  covered  bonds. 
Moreover,  as  any  convergence  would  be  voluntary,  there  is  no  certainty  that  actors  in  the 
market would comply. In addition, there is no guarantee that market standardisation goes in a 

30 

 
prudentially  sound  direction:  the  content  of  market  standards  would  indeed  be  beyond  the 
control of regulators and could deviate from EBA best practices. Finally, there would be no 
covered  bond  label  at  EU  level  in  regulatory  terms,  but  only  national  labels.  All  the  above 
elements hamper both the achievement of further stimulating market development (objective 
1) and addressing prudential concerns (objective 2).  

4.2.  Option 1: Non-regulatory action 

Under this option, harmonisation would be encouraged on a voluntary basis through the use of 
soft  tools  such  as  the  issuance  of  recommendations  by  the  Commission.  This  would 
accompany and support what has already been done by the EBA and the ECBC (see baseline 
scenario). The backing by the Commission would provide further encouragement for Member 
States  and  issuers  to  align  with  the  recommended  best  practices.  No  legislative  initiative 
would be undertaken under this scenario.  

This  option  is  not  in  line  with  the  EBA  advice  and  with  the  EP  Report  as  both  ask  the 
Commission  to  legislate.  This  option  only  partly  overlaps  with  the  third  step  of  the  EBA 
approach where compliance is left to voluntary convergence. However, for the EBA, this step 
should  only  concern  minor  areas  considered  less  critical  in  terms  of  alignment  with 
preferential prudential treatment.  

Under this option: 

a)  Structural  features:  The  structural  features  of  covered  bonds  would  continue  to  be 

regulated mainly at national level;  

b)  Cover  pool:  The  cover  pool  would  continue  to  be  regulated  at  national  level.    For 
covered  bonds  eligible  for  capital  preferential  treatment,  assets  would  remain 
explicitly listed in article 129 CRR; 

c)  Supervision:  The  characteristics  of  the  supervision  model  would  continue  to  be 

regulated at national level;  

d)  Label: The labelling process would be market-driven; 
e)  Preferential treatment: The preferential treatment would continue to be regulated at 

EU level; 

f)  Transparency:  The  transparency  requirements  would  continue  to  be  market  driven.  
For  covered  bonds  eligible  for  capital  preferential  treatment  under  article  129  CRR, 
transparency requirements would continue to be explicitly listed in the same article;  
g)  Technical aspects: Other technical aspects would continue to be regulated at national 

level. 

The main difference with the baseline would be the active role the Commission  would take 
alongside  the  EBA  in  issuing  recommendations  and  best  practices.  In  addition,  market 
standards would continue to play an important role and could be further strengthened by the 
Commission backing.  

4.2.1.  Advantages 

The main advantage of this approach is that it would minimise any potential disruption on the 
functioning of the current regimes and the related costs compared to all other options.  From 
the  regulatory  side,  Member  States  would  have  more  scope  to  retain  their  own  models 
compared to other options. This would help preserve the functioning of at least those markets 
already  working  well.  EU  recommendations  could  provide  backing  both  to  the  EBA  Best 

31 

 
Practices  and  to  market-led  self-regulation  initiatives.  This  could  encourage  Member  States 
drafting  sensible  covered  bond  frameworks  and  align  them  with  EU  recommended  best 
practices. This in turn would help achieving objectives 1 and 2.  

4.2.2.  Disadvantages 

The disadvantages of this option are very similar to those of the baseline. As illustrated above, 
the use of non-binding tools and self-regulation has limits. That undermines the willingness 
and  ability  of  operators  in  less  developed  covered  bond  markets  to  conform  to  an  EU 
recommended  framework.  This,  along  with  the  lack  of  an  EU  label,  would  in  turn  hamper 
further  market  development  (objective  1)  and  in  particular  the  potential  to  develop  not 
existent or very small markets. It would also not help enhance cross-border investments and 
attract  more  investments  from  third  countries.  At  the  same  time,  those  jurisdictions  where 
covered bond features are not coherent with the risk level implied by the EU-wide preferential 
treatment  would  be  allowed  to  leave  their  frameworks  as  they  are.  The  prudential  concerns 
would therefore not be addressed (objective 2). 

Moreover,  this  option  has  been  discarded  by  a  large  majority  of  institutional  stakeholders, 
among them notably the EBA, the European Parliament and the ECB as an ineffective way of 
achieving harmonisation. The majority of other stakeholders have underlined that market-led 
initiatives  are  valuable  but  insufficient.  At  the  beginning  of  the  consultation  process,  a 
majority of market stakeholders (in particular issuers) was in favour of this option. However, 
after  the  EBA  published  its  advice,  clarifying  the  contours  of  a  possible  EU  legislative 
initiative, industry views have evolved, as testified by the ECBC position. Accordingly, only a 
minority of market stakeholders remain in favour of non-legislative action.  

4.3.  Option 2: Minimum harmonization based on national regimes  

Under this option, a harmonised legal framework for covered bonds would be established at 
EU  level.  This  EU  framework  would  aim  at  a  minimum  level  of  legislative  harmonization 
across the EU, building on the characteristics of existing national jurisdictions and seeking to 
avoid  disrupting  well-functioning  markets.  Under  this  option,  the  structural  features  that 
covered bonds must respect in order to be labelled as such would be harmonised to ensure that 
a minimum set of common basic structural rules become applicable across the Single Market. 
The  specificities  of  well-functioning  national  markets  would  be  taken  into  account  and 
accommodated  as  far  as  possible.  Where  possible,  harmonisation  would  remain  principle-
based, minimising detailed provisions to the strict minimum. Member States would therefore 
retain some room of manoeuvre to devise their own laws on how to reach the goals set out in 
the  directive.  This  would  allow  national  specificities  to  remain  in  place,  provided  they  are 
compatible with the principles defined in the EU framework. Under this option, Article 52 of 
UCITS  would  be  replaced  by  a  new  Directive  defining  the  structural  elements  of  covered 
bonds. This would become the new point of reference for other pieces of EU legislation and 
would  be  the  only  EU  definition  of  what  is  a  covered  bond.  Among  those  pieces  of  law, 
Article 129 CRR  would also be adjusted  in  order to  strengthen the conditions  for accessing 
the preferential capital treatment. 

This  option  is  in  line  with  the  EBA  advice  and  with  the  EP  Report  as  both  ask  the 
Commission to legislate and to define (through a directive) the structural features of covered 
bonds  at  EU  level,  remaining  principle  based  and  respecting  the  characteristics  of  national 
markets. Concerning the overall approach and most of the specific recommendations for each 
policy  area,  option  2  comes  close  to  the  EBA  advice.  In  particular,  this  option  follows  the 

32 

 
three-step approach defined by the EBA. However, there are differences between option 2 and 
the EBA Report, notably as regards the level of detail and prescription as option 2 would not 
go as far as sometimes suggested by the EBA.55 

Regarding  the  EP  Report,  option  2  is  in  line  with  the  EP  position  concerning  the  approach 
(principle  based)  and  the  legislative  means  (directive).  However,  also  in  this  case,  in  some 
areas the level of details of the proposal by the EP is too high for a principle-based approach. 
Moreover, the EP Report defines three labels:  PCBs, OCBs and ESNs sharing common basic 
features  and  being  part  of  the  same  legislative  initiative.  This  is  not  endorsed  by  the 
Commission  that  has  already  decided  that  while  the  ESN  is  promising,  given  the  particular 
risk characteristics of SME loans, it requires a dedicated impact assessment separate from that 
of covered bonds.  

Under this option,  

a)  Structural features:  The structural features of covered  bonds would be regulated at 
EU level through a dedicated directive. The very high level principles contained in art 
52  UCITS  would  be replaced  by  a new  self-standing  directive that  would  define  the 
structural elements a covered bond must comply with. This directive would also serve 
as  a  point  of  reference  for  the  several  pieces  of  EU  law  that  grant  preferential 
treatment  to  investments  in  covered  bonds.  It  would  regulate  key  elements  like  for 
example the dual recourse mechanism, the need to segregate cover assets and ensure 
the bankruptcy remoteness of the cover pool.  

b)  Cover pool: The cover pool would be regulated both  at EU and national  level,  with 
principles set at EU level and implementing measures at national level. As is the case 
today, the new instrument would not list what types of assets can be used in the cover 
pool  in  the  context  of  the  directive,  nor  explicitly  exclude  any  of  them  (status  quo 
compared to Art. 52 UCITS). It would nevertheless define principles56 that guarantee 
the high quality level of the assets in the cover pool, allowing for some flexibility for 
the Member States to decide on their preferred assets. At the same time, as it happens 
today,  assets  are  strictly  listed  in  art  129  CRR  in  order  to  identify  the  subgroup  of 
covered  bonds  which  are  granted  preferential  capital  treatment.  Under  option  2,  the 
situation concerning article 129 CRR would stay the same as in the baseline with the 
possibility  to  reassess  some  kinds  of  assets  currently  listed  in  art  129  such  as  ships. 
Assets,  such  as  SMEs  and  infrastructure  loans,  which  most  likely  would  not  fit  the 
principle of asset eligibility set out in the defining directive, could be considered part 
of the ESN initiative targeted at creating a new instrument (see section 1). In terms of 
cover assets, the new directive would also extend the possibility to use pooled covered 
bond structures i.e. covered bonds using as cover assets other covered bonds or pooled 
assets in order to let small issuers enjoy economies of scale. Finally, under this option, 
the  new  directive  would  envisage  the  removal  of  all  legal  obstacles  to  cross-border 
cover pools; 

c)  Supervision: General principles of special public supervision would be defined at EU 
level  specifying  the  areas  that  the  special  public  supervision  should  cover  while 

55   While  the  EBA  declares  to  be  principle-based,  in  certain  areas  (e.g.  liquidity  requirements)  it  effectively 
suggests very detailed provisions which would better suit a full harmonization regime (option 3). Therefore, 
while the EBA advice broadly corresponds to option 2, there are some elements in it that would better fit 
with option 3.  

56   Such assets would need to be of high quality and it should be possible to determine either their market or 
mortgage lending value. In addition, requirements on the legal enforceability would need to be met in order 
to ensure that the cover assets can be repossessed. 

33 

 
                                                 
leaving  the  choice  to  the  Member  States  to  decide  on  how  such  supervision  should 
actually  take  place.  Supervision  principles  also  imply  the  definition  of  eligibility 
criteria  for issuers.  Supervisors  will  have  to  apply  those  principles  when  authorizing 
covered  bond  programs.  Under  this  option,  supervision  would  stay  with  national 
competent authorities.   

d)  Label: Under this option, "European covered bonds" (EU CB) would become an EU 
label. Issuers would be able to (voluntarily) use this label when marketing their bonds, 
provided  that  the  product  complies  with  the  requirements  set  out  in  the  directive. 
Monitoring of compliance with the conditions under which such label could be legally 
used  would  form  part  of  the  special  public  supervision  of  the  covered  bond 
framework.  An  ex-ante  control  of  the  use  of  the  label  would  not  be  necessary,  but 
supervisors should be able to withdraw its use when the conditions are not/or longer 
met (with possible sanctions). National denominations and labels would be able to stay 
in  place  and  could  be  used  simultaneously  or  alternatively,  at  the  discretion  of  the 
issuer. Supervisors should periodically compile a list of EU CBs. This approach would 
differ from the one recommended by the EP report where two different labels would 
be granted to covered bonds: Ordinary CBs (OCBs) when compliant with the directive 
and  Premium  CBs  (PCBs)  when  compliant  with  both  the  directive  and  article  129 
CRR.  Such  double  label  does  not  appear  necessary  to  promote  the  EU  legislation 
among investors and would risk creating confusion as to the actual nature and quality 
of the different instruments.  

e)  Preferential  treatment:  Preferential  treatment  would  only  be  granted  to  covered 
bonds  compliant  with  the  requirements  set  out  in  the  directive.  In  some  cases  (for 
example  for  the  CRR  art  129  capital  preferential  treatment)  additional  conditions 
would need to be met to become eligible for preferential treatment. In particular, the 
conditions  of  eligibility  for  preferential  treatment  in  the  CRR  for  investors  in  the 
banking sector would be strengthened, following advice by the EBA57, by introducing 
additional rules on substitution assets, minimum overcollateralization and by revising 
rules concerning eligible cover assets and LTV limits.58  

f)  Transparency:  transparency  requirements  in  the  form  of  increased  disclosure, 

frequency and granularity would be set in the directive; 

g)  Technical aspects: other technical aspects would be considered mostly in the form of 
principle  based  provisions  leaving  leeway  to  Member  States  to  translate  those 
principles into more detailed requirements. For example, principles would be defined 
in the directive to establish liquidity requirements or specific conditions for maturity 
extensions. 

57   In their 2016 Report and in previous Opinions, the EBA assessed that, from the prudential point of view, the 

requirements set out in art 129 CRR need to be strengthened. See section 2.2.2 

58   Concerning  preferential  treatment  for  investors  in  the  insurance  sector  envisaged  in  Solvency  II, 
Commission services do not have any new data or evidence sufficient to justify a change from a prudential 
perspective. Moreover, the existing risk calibrations for covered bonds are already favourable compared to 
corporate bonds. One can argue that flexible maturity features increase the risk of cash flow uncertainty to 
insurers as investors. While, at this stage, there is no evidence that the calibration needs to be changed, it is 
possible that a new asset category will need to be created and the relevant ESA (EIOPA) will be asked for 
advice on the calibrations. Concerning the preferential treatment for UCITS investors, which is a waiver on 
a concentration limit, there is no evidence suggesting this must be changed and no technical advice by ESAs 
has been produced in this respect. While no change would be directly introduced to the prudential regime 
applicable to UCITS and insurance companies investing in covered bonds, those would nevertheless benefit 
from  the  additional  level  of  harmonisation  and  strengthening  of  investor  protection  envisaged  in  the  new 
directive. Finally, concerning pension funds, there is not currently an EU framework on quantitative capital 
requirements for occupational pension funds, so it is impossible to envisage a preferential treatment at EU 
level for pension funds investing in covered bonds. 

34 

 
                                                 
4.3.1.  Advantages 

This  approach  would  respect  the  national  characteristics  of  those  markets  already  working 
well  as  advocated  by  all  stakeholders  (especially  Member  States).  This  option  would  be  in 
line  with  what  is  envisaged  by  the  EBA  and  the  European  Parliament.  In  general,  all 
stakeholders in the public consultation advocated a principle-based approach building on the 
characteristics  of  existing  national  frameworks  already  working  well.  A  minimum  level  of 
harmonization would help developing markets and stimulate cross-border investments, in line 
with objective 1. At the same time, it would make the framework more robust from the credit 
point  of  view  and  this  would  better  underpin  the  preferential  treatment  envisaged  in  EU 
legislation, so meeting objective 2. This option carries a lower disruption potential compared 
to  options  3  and  4,  as  recognized  by  Member  States  and  stakeholders  and  would  lower 
transition costs as compared with options 3 and 4. Overall it is more in line with subsidiarity. 
Finally,  the  strengthening  of  the  eligibility  conditions  for  the  preferential  prudential 
framework  for  banks  investing  in  covered  bonds  would  also  strengthen  the  international 
credibility of the preferential treatment accorded to covered bonds. 

4.3.2.  Disadvantages 

Being too principle-based could imply the risk of not providing an effective harmonisation, if 
national rules do not properly reflect the principles. This would not help develop markets and 
cross-border  investments  as  per  objective  1.  At  the  same  time,  leaving  Member  States  too 
much flexibility might present the risk of them making more hazardous choices, for example 
in terms of assets to be allowed in the cover pool. This would hamper achieving the objective 
of  addressing  prudential  concerns  (objective  2).  The  main  challenge  with  this  option  would 
therefore  lie  in  how  to  achieve  a  proper  balance  between  a  principles-based  approach  and 
more detail where necessary.  In addition, this option also entails adaptation costs compared 
with the baseline and with option1 (see section 5). 

4.4.  Option 3: Full harmonisation 

This option would involve the design of a new fully harmonised regime for covered bonds at 
EU level. In contrast to option 2 (minimum harmonisation), this option would establish a fully 
harmonised EU framework for covered bonds that would replace existing national regimes. It 
would define every detail of a sound covered bonds regulatory framework. It would also be 
different from option 4 to the extent that it would replace national regimes instead of flanking 
them. The legislative instrument envisaged to implement this option would be a regulation. 

This option differs both from the EBA advice and from the Parliament Report as both ask the 
Commission  to  define  (through  a  directive)  the  structural  features  of  covered  bonds  at  EU 
level, remaining principle based and respecting the characteristics of national markets. A full 
harmonization  instead  would  be  very  detailed,  leaving  no  space  to  Member  States  for 
adaptation and would risk disrupting markets that are currently working well. Option 3 also 
departs from the EBA three steps approach. In spite of all the differences, there are, however, 
some  similarities  between  option  3  and  the  EBA  Report.  The  very  detailed  provisions 
envisaged  in  certain  areas  would  fit  with  this  option  better  than  with  option  2.  Overall, 
however, option 3 foresees a much more detailed harmonisation of rules compared to the ones 
advised by the EBA and proposed by the Parliament. 

Under this option, 

35 

 
 
a)  Structural features: the structural features of covered bonds would be defined at EU 
level.  A  comprehensive  definition  would  focus  on  the  structural  features  a  covered 
bond must have in order to seek regulatory recognition (for example in terms of dual 
recourse  mechanism,  segregation  of  cover  assets  and  bankruptcy  remoteness  of  the 
cover  pool)  and  would  replace  the  covered  bond-related  provisions  in  UCITS 
Directive.  This  would  be  similar to  option  2, except  for the fact  that  all rules  would 
need  to  be very detailed, not  just enouncing  principles, but also accompanying  them 
with operational details as this framework would replace all the existing national ones.   
b)  Cover pool: in terms of cover assets allowed in the cover pool, they would need to be 
explicitly  listed,  thus  significantly  limiting  Member  States  leeway  in  this  area.  It 
would  be  necessary  to  make  specific  choices  on  the  kind  of  traditional  or  not 
traditional assets allowed in the cover pool. In case only traditional assets are allowed, 
the need to launch a parallel and separate instrument based on SMEs and infrastructure 
loans  (ESN,  see  section  2.1)  would  become  urgent.  Coverage  requirements  would 
need to be defined in details. A similar provision allowing pooling structures for cover 
pools  (as  in  option  2),  would  be  introduced  in  order  to  let  small  issuers  enjoy 
economies of scale. Finally, similarly to option 2, also under this option the regulation 
would envisage the removal of all legal obstacles to cross-border cover pools.    

c)  Supervision:  supervision  would  remain  with  national  competent  authorities  for  the 
less significant institutions and for banks outside the euro area, while it would go to 
the SSM/ECB for the largest banks in the euro area. This would be the consequence of 
pursuing  full  harmonization.  Related  level  2  legislation  would  be  required  to  ensure 
consistent  application  of  the  legal  framework.  In  that  respect,  the  duties  of  the 
supervisors  would  need  to  be  spelled-out  in  detail  for  instance  in  terms  of  the  way 
covered bonds programmes would need to be authorised.  

d)  Label:  a  labelling  process  would  be  put  in  place  similarly  to  option  2.  In  this  case, 

however, the EU label would replace all the existing national labels. 

e)  Preferential  treatment:  same  changes  of  the  provisions  governing  the  preferential 

treatment as in option 2. 

f)  Transparency: transparency requirements would change as in option 2. 
g)  Technical  aspects:  other  technical  aspects  would  have  to  be  included  in  the  EU 
framework  with  a  sufficient  degree  of  detail  to  make  them  operational.  Differently 
from  option  2,  there  would  be  no  leeway  in  how  Member  States  implement  those 
detailed  requirements,  as  the  regulation  would  be  directly  applicable.  A  significant 
amount of level 2 legislation would likely be required. 

4.4.1.  Advantages 

As  this  framework  would  include  detailed  proposals  for  every  aspect  of  covered  bond 
operations,  there  is  less  risk  that  Member  States  might  not  implement  uniformly  the  rules 
defined in EU law. This uniformity would help develop markets, as it would provide to every 
jurisdiction  in  the  EU  an  immediate  tool  to  be  used  to  develop  their  markets.  It  would  also 
enhance cross-border investments and international attractiveness of covered bonds. Overall it 
would  strengthen  the  CMU  related  dimension  as  per  objective  1.  At  the  same  time,  as 
Member States would not be allowed the flexibility to make more risky choices, for example 
in terms of assets to be allowed in the cover pool, the risk characteristics of the instrument set 
at  EU  level  would  be  perfectly  aligned  with  the  preferential  treatment  set  at  the  same  level 
and this coherence will help achieving objective 2.  

36 

 
4.4.2.  Disadvantages 

Both institutional and market stakeholders responding to the public consultation have warned 
that  detailed  harmonisation  along  the  lines  of  this  option  could  have  unintended  negative 
consequences,  especially  for  well-functioning  markets,  neutralising  possible  benefits. 
Designing a new framework for covered bonds would imply a more significant disruption of 
the  status  quo  with  the  risk  of  damaging  those  markets  already  working  well,  even  if  a 
transitional  period  may  partly  mitigate  these  concerns.  Under  this  option  transition  costs 
would  be  the  highest  compared  to  all  other  options,  especially  for  those  jurisdictions  not 
aligned with the characteristics of the instrument at EU level. Designing a proper transitional 
phase would be more challenging than for options 2 and 4.  

A  large  majority  of  respondents  to  the  public  consultation  as  well  as  public  stakeholders 
involved in the process, from the EBA to the Parliament, have suggested this option would be 
too disruptive to well-functioning markets entailing too high costs for credit institutions and 
for the overall functioning of financial markets.  

4.5.  Option 4: 29th parallel regime  

This option would be very similar to option 3 with the difference that instead of substituting 
the  current  28  regimes  with  a  new  one  as  envisaged  in  option  3,  the  newly  created  regime 
would co-exist and operate in parallel and compete with the existing 28  ones, becoming the 
29th  regime.  Differently  from  option  3,  the  new  regime,  if  successful,  could  be  expected  to 
gradually replace the existing ones instead of directly superseding them from the outset. This 
replacement would happen on the basis of voluntary adoption by actors in the market.  

This  option  is  not  in  line  with  the  EBA  advice  and  with  the  EP  Report.  Neither  of  the  two 
suggested implementing a 29th regime. 

Under this option, the content of the new regulatory  framework would largely resemble the 
one under option 3: 

a)  Structural features: the structural features of covered bonds would be defined at EU 
level through a regulation. This would be similar to option 3, except for the fact that 
this regulation would not supersede the existing national legislations, but would flank 
them.  

b)  Cover pool: in terms of cover assets allowed in the cover pool, they would need to be 
explicitly  listed,  thus  significantly  limiting  Member  States  leeway  in  this  area.  This 
would be similar to option 3.  

c)  Supervision:  supervision  would  remain  with  national  competent  authorities  for  the 
less significant institutions ad for the banks outside the euro area, while it would go to 
the SSM/ECB for the largest banks in the euro area similarly to option 3. Related level 
2  legislation  would  be  required  to  ensure  consistent  application  of  the  legal 
framework.  It  would  be  similar  to  option  3  except  for  the  fact  that  competent 
authorities  would  have  to  supervise  two  separate  regimes:  the  national  one  and  the 
European one.  

d)  Label:  a  labelling  process  would  be  put  in  place  similarly  to  option  3.  In  this  case, 
however, the EU label would flank the existing national labels instead of substituting 
them. 

e)  Preferential treatment: concerning the preferential treatment two sub-options would 
be  available.  4.1)  Neutral  approach  meaning  existing  EU  rules  granting  preferential 

37 

 
treatment (UCITS, CRR, Solvency, LCR, EMIR) would stay in place and continue to 
grant  preferential  treatment  not  only  to  EU  covered  bonds  issued  under  the  29th 
regime,  but  also  to  covered  bonds  issued  under  national  frameworks,  as  is  the  case 
now.  However,  this  may  not  provide  sufficient  incentives  for  market  participants  to 
use the new 29th regime. 4.2) Providing incentives to pursue the  maximum take up of 
the 29th regime meaning the current preferential treatment at EU level would need to 
be  reserved  exclusively  to  the  29th  regime  with  high  costs  of  disruption  of  existing 
markets.  

f)  Transparency: transparency requirements would change as in option 3. 
g)  Technical  aspects:  other  technical  aspects  would  have  to  be  included  in  the  EU 
framework with a sufficient degree of detail to make them operational as in option 3. 
A significant amount of level 2 legislation would likely be required. 

4.5.1.  Advantages 

A  29th  regime  would  offer  an  off-the-shelf  comprehensive  regulatory  framework  to  issuers 
wanting  to  use  an  EU  label  for  attracting  investors.  Member  States  with  no  or  with 
underdeveloped covered bond markets could be expected to use the new regime. This option 
would  offer  flexibility  to  issuers  who  would  be  able  to  choose  between  issuing  under  their 
existing  national  regimes  or  the  29th  regime.  Finally  this  option  should  offer  the  benefit  of 
providing a fully integrated regime for issuers on a voluntary basis and would not require any 
amendments to existing national covered bond laws.  

4.5.2.  Disadvantages 

The main risk of this option would be that the market development and prudential objectives 
set out  above would not be achieved due to a limited  market take-up, especially  under sub-
option 4.1. Its adoption by market participants is indeed based on a voluntary choice and there 
is no guarantee this regime will become the standard at EU level, especially in well stablished 
markets  where  issuers  and  investors  alike  highly  value  their  systems.  However,  as  outlined 
above,  the  29th  regime  could  take  off  in  less  developed  covered  bond  markets.  This  could 
cause  fragmentation  in  the  EU  internal  market  and  would  also  increase  costs  as  different 
regimes  would  run  in  parallel.  In  addition,  the  survival  of  several  well-established  regimes 
plus the 29th would confuse investors and increase complexity.  

To overcome the issue of a limited take up and related fragmentation, incentives would need 
to be provided as for sub-option 4.2. However, this would be politically contested. Both sub-
options present high  costs, with  no obvious compensating benefits.   All  the above has  been 
recognized  by  stakeholders  by  all  sides  both  from  institutions  and  the  market.  A  large 
majority of respondents to the open public consultation have rejected this option. This option 
builds  on  market  participants  adopting  the  new  market  practice  to  be  successful.  Given  the 
scepticism  expressed  by  all  stakeholders,  this  is  unlikely  to  be  the  case.  This  option  is 
therefore unlikely to meet the objectives set out above.  

4.6.  Discarded option: adjusting the prudential treatment  

A logical alternative that can be considered, at least to address prudential concerns, would be 
to  adjust  the  preferential  prudential  treatment,  instead  of  harmonising  the  structural 
requirements of the instrument.  

38 

 
However,  adjusting  preferential  prudential  treatment  could  only  mean  downsizing  it,  if  one 
wants  to  address  the  prudential  concerns  highlighted  above.  The  preferential  treatment 
currently  granted  can  be  considered  the  maximum  acceptable  deviation  from  international 
standards  (for  example  Basel).  Repealing  or  limiting  the  prudential  treatment  would  have 
disruptive effects on existing markets. According to ICF59, the effect of the loss of preferential 
capital  treatment  for  covered  bonds  can  be  estimated  by  observing  the  differential  in  yields 
between  CRR  compliant  and  non-CRR  compliant  covered  bonds  by  the  same  issuer.  A 
reliable example of this is provided by two series of bonds issued by the same Danish issuer. 
The spread in the yields between a CRR compliant and a non-CRR compliant covered bond 
both  issued  by  the  same  issuer  with  the  same  maturities  range  between  4.8    and  21.1  basis 
points  (average  12.0,  timeframe  considered  November  2014-July  2015)  where  the  higher 
yield  is  attached  to  the  non-CRR  compliant  bond.  This  could  provide  an  estimate  of  the 
benefits investors attach to the preferential treatment. The latter does not only concern CRR 
capital weighting, but also other forms of preferential treatment granted to covered bonds by 
EU  legislation  such  as  the  LCR  preferential  treatment  for  liquidity  purposes  (see  section 
2.1.2).  While  it  is  difficult  to  accurately  estimate  the  effect  on  yields  of  a  lower  or  no 
recognition of the asset class in the LCR delegated act60, it is possible to use again a Danish 
example to provide an estimate of the spread in yields between bonds classified as level 1 and 
2A61 which amounts to 2 basis points and, between 2A and no eligibility at all, which amounts 
to  7 basis points62. Also  in  this case,  non-eligibility for preferential treatment translates into 
higher  yields  for  investors  and  higher  costs  for  issuers.  For  issuers  therefore,  losing 
preferential treatment would translate into several basis points of increased cost of funding. 

This  option  does  not  have  any  stakeholder  support  among  the  industry,  but  also  among 
supervisors and it was not even mentioned in the EBA Report nor in the Parliament Report. 
Considering  the  significant  disruption  it  would  cause  to  well-functioning  markets  with  no 
apparent  compensating  benefits  and  considering  also  the  lack  of  stakeholders  support,  this 
option is discarded and won't be assessed.   

The  ultimate  purpose  of  adjusting  the  preferential  treatment  would  be  to  better  target  it  at 
those covered bonds that exhibit risk characteristics coherent with the preferential treatment. 
Accordingly, judgements would need to be made on the features of an instrument that makes 
it  less  risky.  In  the  end  this  approach  would  also  be  concerned  with  assessing  structural 
features of covered bonds, albeit in an indirect way and would imply harmonization via the 
back-door.  However,  the  harmonization  of  structural  characteristics  in  one  single  piece  of 
legislation (as envisaged under the four options above) appears a more efficient and coherent 
way to tackle prudential concerns. 

59   ICF, 2017, pp. 48-49. 
60   As the factors that cause them to be recognized for preferential treatment are themselves price sensitive it is 

difficult to isolate the effect of the LCR treatment. 

61   The LCR requires that the liquidity buffer is made up of assets in the following categories: Level 1, Level 2a 
and  Level  2b.  The  levels  not  only  determine  the  maximum  eligibility  of  securities  for  being  part  of  the 
buffer (Level 1 to an unlimited extent, but at least 60% of the overall buffer; Level 2a maximum 40% and 
Level 2b maximum 15%), but also the haircut that applies to the market value. Under certain circumstances, 
covered bonds can be classified either as Level 1 or Level 2a or 2b. 

62   ICF Report, 2017, p. 49. 

39 

 
                                                 
5.  ASSESSMENT OF POLICY OPTIONS 

This  section  assesses  the  benefits  and  costs  of  the  proposed  options  both  at  aggregate  level 
and  by  relevant  stakeholder  groups.  It  will  assess  the  benefits,  of  both  direct  and  indirect 
nature, against the general and specific objectives outlined in section 3.  

In order to assess how the different options fare with respect to the first general objective of 
tapping CMU potential, the section starts by presenting benchmarks that define the maximum 
benefits that can be expected from having harmonized EU covered bond markets. Similarly, a 
benchmark  is  provided  for  the  direct  costs  arising  to  covered  bond  issuers,  investors  and 
supervisors.  As  regards  the  second  general  objective,  addressing  prudential  concerns,  the 
extent to which prudential concerns would be addressed under each option is more difficult to 
assess  against  a  quantitative  benchmark.63  The  assessment  of  the  benefits  and  costs  of  each 
option against that objective will accordingly be of more qualitative nature.  

In addition, the options will be assessed in terms of (1) how effective they are in achieving the 
objectives; (2) how efficient they are in light of associated costs; (3) how coherent they are 
with  broader  EU  policies;  and  (4)  how  they  affect  key  stakeholders  (issuers;  investors; 
supervisors; and, citizens).  

The  retained  policy  option  will  be  one  ensuring  the  best  possible  achievement  of  the  stated 
objectives,  while  at  the  same  time  imposing  the  smallest  costs  and  impacts  on  stakeholders 
and enjoying their support and being coherent with broader EU policy objectives. 

Figure 8 summarizes the methodology followed to identify the retained option. 

Figure 8.  Methodology for assessing benefits and costs and choose the retained option 

63 To give an idea of the size of the concern, it could be noted that 32% of covered bonds are owned by banks 
which means almost €700 billion of assets in EU banks' balance sheets are investments in covered bonds. 

40 

 
 
 
                                                 
5.1.  Benchmark benefits and costs  

The  extent  to  which  markets  are  likely  to  develop  (objective  1)  under  each  option  will  be 
measured  through  the  following  "benchmarks"  that  define  the  maximum  benefits  for  each 
concerned dimension:  

a)  Number of countries adopting a covered bond framework in line with EBA best 

practices; 

b)  Additional issuance of covered bonds; 
c)  Savings in terms of funding costs for banks issuing covered bonds; 
d)  Overall savings in funding costs for the real economy; 
e)  Diversification of the investor base; 
f)  Share of cross border investments in covered bonds; 
g)  Share of covered bonds held outside the EU. 

A similar approach will be followed to assess the costs of each option. The benchmark costs 
are  derived  from  the  costs  currently  borne  by  stakeholders  in  those  jurisdictions  which  are 
more in line with the potential EU framework. In particular, the following benchmarks will be 
provided for the different categories of costs: (1) direct administrative one-off costs; (2) direct 
administrative recurrent costs; and, (3) enforcement costs. The different options will then be 
assessed in relative terms compared with benchmark costs. 

5.1.1.  Benchmark benefits 

This  section  further  outlines  the  specific  benchmarks  that  would  be  used  for  assessing  the 
options.  Table  5  further  below  summarises  the  benchmarks  benefits  and  their  relationships 
with specific objectives. 

a) Number of countries adopting a covered bond framework in line with EBA best practices 

The  benchmark  for  this  benefit  is  represented  by  the  maximum  number  of  Member  States 
required  to  introduce  or  amend  their  covered  bond  legislation  in  order  to  comply  with  the 
EBA best practices. According to the EBA, only one Member State (NL) complies in full.64 
The  benchmark  number  would  therefore  be  27.  This  includes  countries  needing  less 
significant amendments, countries needing an overhaul of their legal framework and countries 
needing  to  introduce  a  totally  new  framework  from  scratch.  Under  the  baseline,  one  could 
expect eight countries to take action in order to comply with the EBA best practices. Based on 
the EBA Report, there are four countries that are already amending their national frameworks 
(CZ,  FR,  EL,  and  SK).  In  addition,  other  Member  States  have  recently  decided  to  set  up  a 
legislative framework (EE, LT, LV and HR).   

b) Additional issuance 

The  Commission  services  estimate  that  the  total  size  of  the  currently  untapped  market 
potential for covered bond across the EU in terms of issuance could be up to EUR 342 
billion. This figure is based on the assumption that a fully harmonised regime could increase 
the use of covered bonds up to the benchmark level of 8.5 % of total loans in all EU Member 
States  currently  below  that  benchmark.  The  benchmark  has  been  calculated  as  the  median 
value  of  the  ratio  of  covered  bonds  to  total  bank  loans  currently  observed  among  Member 

64   EBA (2016). 

41 

 
                                                 
States  with  established  markets.65  The  benefit  in  terms  of  additional  issuance  would 
significantly  accrue  to  new  markets  (EUR  63  billion  out  of  EUR  342  billion).  This  share 
represents about one fifth of additional issuance, significantly above the current share of the 
same  markets  out  of  the  outstanding  total (1.3%).  Annex  4  presents  further  details  on  these 
figures.  

Under the baseline, the size of benefits in terms of additional issuance would be around one 
quarter  of  the  benchmark  or  around  EUR86  billion  (less  than  proportional,  considering  the 
only  large  country  in  the  sample  would  be  France).  This  is  confirmed  by  EBA  analysis66, 
according  to  which  long-term  secured  funding  for  EU  banks  is  expected  to  grow  from 
EUR1.5 trillion in 2016 to approximately EUR1.6 trillion in 2019. 84% of this figure would 
be represented by covered bonds. 

c) Savings in terms of funding costs for banks issuing covered bonds 

The  Commission  estimates  that  the  total  savings  in  terms  of  funding  costs  for  EU  banks 
issuing  covered  bonds  are  between  EUR  2.2  billion  and  EUR  2.7  billion  on  an  annual 
basis67. This figure is based on three main assumptions: 

(1) 

(2) 

(3) 

that  a  fully  harmonised  regime  could  increase  the  use  of  covered  bonds  up  to  the 
benchmark level of 8.5 % of total loans in all EU Member States (see benchmark b); 
that covered bonds provide a funding benefit in the range between 30 bps and 45 bps 
compared to unsecured funding68; 
that a strengthened regime would result in an additional 5 bps funding benefit on all 
covered bonds, as estimated by the commissioned study (ICF, 2017). 

While this figure should be seen as a benefit for all banks in the EU, the specific benefit for 
the countries where covered bond markets are already well developed is mainly linked to the 
third component (EUR1.1 bn). On the contrary, for new markets this benefit is mainly related 
to the issuance of covered bonds instead of unsecured bonds. Issuers in new markets would 
save  between  EUR  200  million  and  EUR  300  million  on  an  annual  basis  in  the  long  term. 
Annex 4 presents further detail on how these figures have been obtained.  

Under the baseline, one could expect the size of benefits in terms of savings for banks would 
be around one quarter of the benchmark i.e. between EUR 0.5 billion and EUR 0.7 billion on 
an annual basis.  

d) Overall savings in borrowing costs for the real economy 

1. 
Lower funding costs are likely to  be at least partially  passed through to  customers, 
freeing resources to be lent to households and firms. This would create wider benefits for the 
real  economy.  The  Commission  estimates  that  the  potential  overall  annual  savings  for  EU 

65   See Annex 4 for further details on how this figure has been obtained. 
66   EBA (2017a). The EBA survey is based on a sample of 155 banks from all EU countries asking about their 

funding plans for 2017-2019.  

67   This  benefit  should  be  seen  as  a  long-term  benefit  based  on  the  assumption  that  the  outstanding  will  be 
rolled over and gradually replaced by new issuance at lower interest rates. This implies that the benchmark 
benefit is not expected to be achieved immediately after the entry into force of the legislation. In the first 
years  following  entry  into  force,  savings  would  result  lower  than  the  expected  benchmark  and  their  size 
would depend on the amount of yearly issuance. 

68   Savings  for  banks  should  be  seen  as  gross  of  the  increased  costs  related  to  issuing  covered  bonds  (see 

section on benchmark costs). 

42 

 
                                                 
borrowers  would  be  between  EUR  1.5  and  EUR  1.9  billion69.  This  figure  has  been 
obtained considering the savings in terms of funding costs for banks issuing covered bonds as 
calculated in point c) and using the estimated long-term pass-through rate by Illes et al. (2015) 
of about 70%.  

The  economic  literature  has  extensively  assessed  how  credit  institutions'  funding  costs  get 
translated into lending rates for the real economy. According to the prevailing consensus, this 
pass-through effect does function relatively well over the medium- to long-term, even though 
the  short-term  adjustment  is  imperfect70.  Illes  et  al.  (2015)  identify  a  stable  positive 
relationship between lending rates and bank funding costs for European countries both in the 
euro area and outside the euro area71 over the period 2003–2014, comprising the pre-crisis and 
post-crisis periods. They estimate this pass-through rate at around 70%. The bulk of existing 
studies  use  samples  of  banks  in  advanced  economies.  It  could  be  argued  that  thanks  to  the 
existence  of  a  single  banking  rulebook  applicable  across  all  EU  Member  States,  banking 
models of central and eastern European countries would become more structurally similar to 
the rest of Europe. In addition, some studies suggest that heterogeneity in the banking rates 
pass-through  exists  only  in  the  short  run  (Gambacorta,  2008).  The  estimate  of  the  pass-
through provided by Illes et al. (2015) can therefore be deemed acceptable across all Member 
States. 

Under  the  baseline,  the  benefits  in  terms  of  overall  savings  for  the  real  economy  would  be 
around one quarter of the benchmark i.e. between EUR 0.4 billion and EUR 0.5 billion on an 
annual basis. 

e) Diversification of the investor base 

The cumulated share of investments in covered bonds by banks and central banks amounted 
to 63% in 2016 (see section 2.1.1.). In the baseline scenario one could assume that this share 
would go down to 50% in light of the end of the ECB purchasing programme (see section 4, 
baseline). This forecast seems relatively conservative given past experience.72 In addition, one 
could expect that a unified EU covered bond markets would add another 10% to the share of 
covered  bonds  purchased  by  financial  institutions  other  than  banks.  Taken  together,  this 
would bring the benchmark to 60%.  

Under the baseline, the only effects in terms of diversification would come from the gradual 
phasing out of the ECB purchasing programme  (around 50% of investors other than banks). 
There would be no further effects resulting from e.g. further market integration.  

f) Share of cross-border investments 

A proxy for the level of development of cross-border investments is represented by the share 
of inward investments in a Member State coming from other Member States out of the total of 
the covered bond market in that Member State. This share varies significantly: from 92% for 
the  UK  to  28%  for  Germany.73  A  possible  estimate  of  a  benchmark  for  cross-border 
investments  would  therefore  be  provided  by  the  median  of  these  values  equal  to  73%. 

69   Similar considerations hold as for banks' savings (benchmark c) for which see note 66. 
70   For  example,  see  Banerjee  et  al.  (2013);  Gambacorta  (2008);  Borio  and  Fritz  (1995);  De  Bondt  (2002); 
Hofmann  and  Mizen  (2004);  De  Graeve  et  al.  (2007);  Kwapil  and  Sharler  (2010);  Darracq-Paries  et  al. 
(2014).  

71   The total sample refers to: AT, DE, DK, ES, FI, FR, IE, IT, NL, PT, UK. 
72   For example, in 2013 the year before the CBPP3 started, the share held by banks and central banks was 48% 
73   ICF (2017a), p.30. This ranking only takes into account established covered bond markets. 

43 

 
                                                 
Currently,  most  cross-border  investments  take  place  between  countries  that  share  similar 
characteristics  in  terms  of  covered  bond  legislation  and  property  valuations  standards.  For 
example,  in  Finland  almost  three  quarters  of  foreign  investments  come  from  Germany  and 
other Nordic countries and in other Nordic countries this share is about two thirds (see section 
2.1.1). It is difficult to foresee the effect of better harmonization at EU level for this regional 
integration of covered bond markets. However, the trend could go in the direction of lowering 
this  share  in  order  to  better  diversify  the  number  of  different  countries  investing  in  a  given 
market.  This  would  provide  benefits  in  terms  of  less  concentration,  further  financial 
integration and improved financial stability.   

Under the baseline, cross-border investments would likely stay close to or slightly above the 
current level with slight improvements in some countries such as the Baltics if they decide to 
undertake a common legal framework. This would, however, represent a small percentage of 
the benchmark.  

g) Share of covered bonds held outside the EU  

The  benchmark  for  the  level  of  investments  by  third  countries  in  the  EU  covered  bond 
markets can be assumed to be the same as the level of investments by third countries for all 
debt  securities  issued  in  the  EU  which  is  estimated  at  an  average  of  16.5%.  Currently  the 
share as regards covered bonds is only 11% (see section 2.1.1). Hitting the 16.5% benchmark 
would  translate  into  an  additional  EUR  115  billion  of  investments  in  EU  covered  bond 
markets coming from outside the EU on a multi annual long term horizon74.  

Under the baseline, third-country investments would likely stay at the current level.  

Table 5 – Intervention logic diagram + benchmarks 

Problems and consequences 
Consequence 1  
Untapped CMU potential  

Objective 
General Objective 1 
Enhance CMU potential  

Problem  1:  Unevenly  developed 
national markets 

Specific  objective  1:  develop 
covered  bond  markets  in  all  EU 
countries 

Problem 
investor base  

2: 

undiversified 

Specific  objective  2:  diversify 
investor base  

Problem  3:  obstacles  to  cross 
border investments  

Specific  objective  3:  tap  potential 
for more cross border investments  

levels  of 
Problem  4: 
investments from outside the EU  

low 

Consequence 2  
Prudential concerns  

objective 
Specific 
investors from outside the EU  

4: 

attract 

General Objective 2 
Coherence 
regulation  

of  EU  prudential 

Benchmarks 

a) Number of countries adopting a 

framework 
b) Additional issuance 
c) Savings of funding costs for 

banks 

d) Overall savings in borrowing for 

the real economy 

e)  Diversification  of  the  investor 
base 

f)  Percentage  of  cross-border 
investments 

g)  Percentage  of  covered  bonds 
held outside the EU 

Problem  1:  diversity  in  national 
covered bond frameworks  

Specific  objective  1:  align  the 
structural characteristics of covered 

No measurable benefit 

74   This  number  is  based  on  the  assumption  that  the  average  of  16.5%  would  be  applied  to  the  current 
outstanding covered bonds, not considering additional issuance. The result has to be seen as a multi annual 
long term benefit. The yearly amount has not been estimated. 

44 

 
 
 
                                                 
Problem  2:  capital  preferential 
treatment not adequate 

bonds across the EU  

Specific  objective  2:  strengthen 
the 
capital 
preferential  treatment in CRR  

requirements 

for 

No measurable benefit 

Problem 3: increased risks due to 
financial innovation  

Specific  objective  3:  define  a 
framework for soft bullets/CPTs 

No measurable benefit 

5.1.2.  Benchmark direct costs 

Issuing covered bonds implies significant one-off and recurring costs (due to establishing and 
running a covered bond programme), which are a function of several factors. Among them: (i) 
the size of the covered bond programme; (ii) the structure of the covered bond issuer; and (iii) 
country  specific  factors  such  as  legal  and  supervisory  requirements.  It  is  possible  to 
distinguish three main types of direct costs: (a) the initial costs of setting-up a covered bond 
programme; (b) the ongoing (annual) costs of running a covered bond programme; and (c) the 
costs of single issuance.  

a) Direct administrative one-off costs 

The upfront costs of setting up a  covered bond programme, as estimated in the ICF study75, 
comprise the following: 

  Cost  of  setting  up  IT  systems  to  support  the  administration  and  management  of  the 

programme including risk management, monitoring and reporting of the cover assets; 

  Legal fees including the cost of a prospectus; 
  Application  and  registration  fees  i.e.  the  cost  of  registering  the  programme  with  the 

regulator or supervisor; 

  Investment  bank  fees:  these  are  typically  a  function  of  maturity  of  the  bond  e.g.  for  a 
standard  five  year  deal,    investment  banking  fees  would  be  of  the  order  of  0.2%  of  the 
amount  raised. Sometimes,  an issuer does  not pay any fees on the basis  of an agreement 
that  the  issuer  will  use  the  investment  bank  for  the  first  few  bond  deals  and/or  give  that 
bank a disproportionate amount of the total fees payable on them; and 

  Rating  agencies’  fees:    a  minimum  set-up  and  first  issuance  fee  of  €65,000  (limited 
approach)  to €100,000 (full  approach) for Eastern EU issuers and €70,000- €150,000 for 
Western EU is charged by Fitch Ratings. S&P charges a standard fee of €85,000 for annual 
surveillance of a covered bond programme. 

Total costs vary significantly between countries and banks, depending on the business model 
and on different arrangements not only with private parties but also with supervisors.76  

For  example,  Denmark  is  the  country  where  the  upfront  costs  are  the  highest  due  to  their 
specific business model based on specialist credit institutions and to the specific supervisory 
model which is very comprehensive and totally paid by banks (costs ranging between EUR2.2 
million and EUR3.8 million per programme). The situation in other Nordic countries such as 
Sweden and  Finland is similar. In  France,  upfront  costs range between EUR1.6  million and 
EUR2.3  million.  In  Italy,  they  vary  between  EUR400,000  and  EUR1.5  million.  In  the  UK, 

75    2017, ICF, pp.174-175. 
76   For example, in Denmark the supervisor charges the banks for the cost of their comprehensive supervision. 

Danish banks do not have the choice to outsource some of the costs to external providers. 

45 

 
                                                 
between  EUR750,000  and  EUR3.4  million.  Estimates  for  Germany  are  only  partially 
available. However, it is possible to infer that costs belong to the upper hand of the spectrum.   

(EUR330,000-825,000),  Belgium 

On  the  other  hand,  there  are  countries  with  lower  upfront  costs  such  as  Luxembourg 
(EUR430,000-
(EUR100,000-350,000),  Netherlands 
510,000) and Eastern European countries (for example Poland is around EUR400,000). The 
median  of  the  minimum  and  maximum  value  is  respectively  EUR590,000  and  EUR1.8 
million and could be considered a benchmark for one-off direct costs. In this case, however, 
the  benchmark  has  to  be  seen  as  the  value  towards  which  low-cost  jurisdictions  would 
converge,  while  high-cost  jurisdictions  are  not  expected  to  decrease  their  costs  and  would 
therefore not converge towards the benchmark.77 Under the baseline, out of the eight Member 
States expected to take action, four (CZ, FR, EL, SK) are not undertaking changes that would 
significantly  modify  their  current  structure  of  one-off  costs,  while  only  the  other  four  (EE, 
HR,  LT,  LV)  are  expected  to  increase  their  one-off  costs  towards  the  benchmark,  while 
keeping the increase at a minimum. Overall, this would result in a very small move towards 
the benchmark. 

b) Direct administrative recurrent costs 

These costs typically include78:  

  Staffing costs for running the covered bond programme; 
  Costs  of  back  office  operations,  including  IT  maintenance:  these  can  be  expected  to  be 
negligible once a covered bond programme has been set-up involving monthly running of 
reports  or  checking  of  accounting  entries.  Smaller  issuers  with  less  sophisticated  IT 
systems might need to carry out manual intervention, in which case these would involve at 
most 0.5 full time equivalent; 

  Cost  of  the  cover  pool  monitor:  this  depends  on  whether  the  cover  pool  monitor  is 

mandatory and if his tasks are carried out by external providers or by the supervisor; 
  Cost of professional bodies e.g. ECBC (EUR8,000 per year) and national industry body; 
  Cost of the covered bond label comprising the initial registration fee of EUR5,000 payable 
with  the  registration  of  a  new  cover  pool,  an  annual  fee  for  the  label  of  EUR3,800  in 
subsequent years, an additional volume issuance fee of EUR1 per million of new issuance 
(capped at EUR5,000 per year; not payable on the first year of a new Label), the fees and 
expenses  of  the  Bond  Trustee  and  Security  Trustee  (if  any),  ranging  from  EUR7,500  to 
EUR72,600. 

Total costs vary significantly between countries and banks, depending on the banking model 
and  on  different  arrangements  not  only  with  private  parties  but  also  with  supervisors.  For 
example,  in  Denmark  they  are  quite  high,  at  around  EUR2.2  million  on  an  annual  basis, 
because supervisory costs are paid annually by banks on top of their administrative costs. In 
France,  they  range  between  EUR0.5  and  1.8  million  per  year.  In  the  UK,  between  EUR0.4 
and 2.8 million.  In other Member States, ongoing costs are lower, ranging between less than 
EUR100,000 (Italy and Portugal) and EUR475,000 (Netherlands).  

The  median  of  the  minimum  and  maximum  value  ranges  between  EUR300,000  and 
EUR475,000  and  could  be  considered  a  benchmark  for  recurring  direct  costs.  In  this  case, 

77   The  costs  related  to  setting  up  and  running  a  covered bond  programme  come  from ICF  (2017).  For more 

details on direct one-off costs, see Annex 5.  

78   Estimates based on ICF (2017), in particular pp.175-177. 

46 

 
                                                 
however,  the  benchmark  has  to  be  seen  as  the  value  towards  which  low-cost  jurisdictions 
would  converge,  while  high-cost  jurisdictions  are  not  expected  to  decrease  their  costs  and 
would therefore not converge towards the benchmark.79 Under the baseline, out of the eight 
Member States expected to take action, four (CZ, FR, EL, SK) are not undertaking changes 
that would significantly modify their current structure of recurring costs, while only the other 
four (EE, HR, LT, LV) are expected to increase their recurring costs towards the benchmark, 
while  keeping  the  increase  at  a  minimum.  Overall,  this  would  result  in  a  very  small  move 
towards the benchmark. 

The costs associated with each issuance belong to the same category of recurrent costs. They 
typically include the following80: 

  Rating fees: Fitch rating charges fees on all covered bond issuance as a percentage of the 
total issue size. The fees range from 0.25 bps (limited approach) to 1.0 bps (full approach) 
in Western EU countries. A flat rate of 0.5 bps is charged in Eastern European countries. It 
should be noted that issuers often get 2-3 ratings for their issues; 

  Legal  fees  per  issue  is  typically  either  nothing  or  a  very  small  amount,  but  for  a  small 
number of issuers (in particular those who do not issue from a standard programme), these 
could range from €100,000 to €300,000; 

  Fees  and  expenses  incurred  in  connection  with  the  listing  of  the  covered  bonds  on  stock 

markets. These can range from €4,000 in UK to €150,000 in Sweden. 

  Fees  relating  to  ISDA  documentations  (Swaps),  which  depends  upon  the  number  of 

counterparties an issuer has; 

  In  some  countries,  audit  fees  are  payable  per  issuance  (for  instance,  in  Hungary  this 

represents about €20,000 per issue). 

Issuance costs mainly depend on the size of the issuance, vary significantly from one issuance 
to  the  other  and  are  negligible  compared  to  total  costs  and  as  a  result  there  is  no  dedicated 
benchmark.81 

Overall,  the  costs  of  setting  up  and  running  a  covered  bond  programme  are  quite  high,  and 
generally  higher  than  issuing  unsecured  debt.  According  to  the  German  association  of 
Pfandbrief  Banks  (VdP),  while  covered  bonds  allow  banks  to  save  on  the  cost  of  their 
funding,  the  high  costs  that  issuing  covered  bonds  entails  imply  that  the  breakeven  point  is 
around 20 basis points. This means that if banks save less than 20 bp when they issue covered 
bonds,  instead  of  unsecured  debt,  covered  bonds  are  no  longer  convenient.  However, 
compared  to  securitization,  covered  bonds  are  still  considered  a  more  efficient  source  of 
funding for banks. This is because covered bond costs can be spread across several issuances, 
which eventually results in lower operational costs for each issuance of covered bonds. The 
advantage  of a covered bond programme is  indeed that  once set up and registered, multiple 
transactions  can  be  issued  under  the  programme  i.e.,  each  new  issuance  benefits  from  the 
existing structure of the covered bond programme and bears only a negligible fraction of the 
total costs. In contrast, for securitisation, each new issuance entails new costs. Covered bonds 
are thus regarded as a more efficient funding tool by issuers. In addition, from an investor’s 

79   For more details on direct recurring costs, see Annex 5. The costs related to setting up and running a covered 

bond programme come from ICF (2017). 

80   2017, ICF, pp.177-178. 
81   For more details on issuance costs, see Annex 5. The costs related to setting up and running a covered bond 

programme come from ICF (2017). 

47 

 
                                                 
perspective,  due  diligence  costs  are  lower  for  covered  bonds,  as  it  is  a  more  standardised 
product.  

c) Enforcement costs 

To  define  a  benchmark  for  enforcement  costs  two  supervisory  models  are  considered.  One 
benchmark  is  represented  by  the  Danish  model  which  implies  strong  supervision  and  a 
comprehensive  list  of  tasks  all  carried  out  by  the  supervisor  itself  with  no  possibility  of 
outsourcing.  Costs  are  borne  by  banks  and  annually  paid  to  the  supervisor.  In  Denmark, 
supervision  of  mortgage  credit  institutions  (issuing  covered  bonds)  is  carried  out  by  the 
Danish FSA. The Danish FSA does the following: 

  Issuance of license: one off covered bond specific licensing;   
  Periodic review and analysis of the data/documentation provided by the issuer82; 
  Periodic  quality  check  of  cover  assets  including  checks  on  eligibility  of  assets  and  real 

estate valuations (including regular on-site visits); 

  Periodic  monitoring  of  the  exposure  of  the  covered  bond  programme  to  market  risk  and 

liquidity risk; 

  Periodic checks of minimum mandatory over collateralisation requirements; and 
  Evaluation of operational risks of the issuer. 

Around 17 FTEs across different departments of the Danish FSA are involved in supervising 
covered bond programmes (of which roughly 3.5 FTEs are involved in on-site inspections of 
covered bond issuers). The average salary cost per FTE is DKK650,000 (~ EUR87,400). In 
addition,  the  average  overhead  per  FTE  is  DKK390,000  (~  EUR52,450).  The  annual  costs 
incurred  by  the  Danish  FSA  for  supervising  covered  bonds  issuers  can  be  estimated  at  ~ 
EUR2.4 million. Considering that there are only nine issuers in Denmark, the average cost of 
supervision  per  issuer  would  amount  to  EUR267,667.  The  average  cost  per  covered  bond 
programme  can  be  estimated  at  EUR103,367  (based  on  ECBC  data  on  the  number  of 
programmes  equal  to  23  in  2014  and  2015).  The  institutions  under  supervision  pay  for  the 
costs  associated  with  their  supervision.  The  cost  of  running  the  Danish  FSA  is  therefore, 
allocated to the different institutions under supervision based on different measures. 

The second benchmark is represented by the German model which is also characterized by 
strong  supervision,  however  this  is  not  entirely  carried  out  by  the  supervisor  itself.  Some 
tasks,  such  as  the  monitoring  of  the  cover  pool,  are  exercised  by  external  contractors.  In 
Germany,  Department  BA  57  of  the  Federal  Financial  Supervisory  Authority  (BaFin)  is 
responsible for conducting cover pool audits at Pfandbrief banks at two-year intervals, either 
using its own staff (appraisers), or Cover Pool Administrators (CPAs) experienced in the area 
of Pfandbrief cover pool audits (selected through a tendering process). The cost of cover pool 
audits  conducted at two year intervals for the year 2015 was €718,000  for CPAs audits (17 
audits in 2015) and €224,000 for Bafin internal staff (8 audits in 2015). The average cost per 
audit  was  of  €42,000  per  CPAs  and  €28,000  for  internal  staff.  Department  BA  57  of  Bafin 
total budget for 2015 was made up of direct costs of €1.55 million (of which direct staffing 
costs:  €1.51  million)  and  overhead  costs  of  €1.18  million  for  total  costs  of  €2.73  million. 
Approximately 78% of Bafin BA 57 FTE is dedicated to covered bond supervisory activities. 
Assuming that a similar percentage of the budget is devoted to covered bond monitoring, this 
would mean that costs related to monitoring covered bonds amount  to €2.13 million. While 

82   For  instance, reports of  mortgage  banks  to the  Danish FSA  are  provided  on  the quarterly  basis and cover 

credit risk exposure, market risk exposure and solvency risk. 

48 

 
                                                 
this  figure  looks  similar  to  the  Danish  total,  it  differs  in  respect  to  what  it  includes.  For 
example, Bafin outsources some audits to external auditors and it does not perform the duties 
of  the  cover  pool  monitor  which  are  exercised by  external  contractors.  On  the  contrary,  the 
monitoring of the cover pool is part of the supervisory activity of the Danish FSA. As a result 
of  these  differences,  but  also  of  the  different  number  of  issuers  which  allows  economies  of 
scale in the German case, the average cost per issuer would be significantly lower in Germany 
(€25,350) than in Denmark (€237,745 - €264,161). The costs not recovered from Pfandbrief 
banks  are  funded  as  part  of  BaFin’s  general  budget  (i.e.  via  cost  allocation  to  supervised 
entities, where being a Pfandbrief bank would not imply specific treatment).  For more details 
on supervisory costs see Annex 583. 

Among the two models, the German one could be  considered the actual benchmark, as it is 
close to the model of supervision that fits with the harmonized framework  and, at the same 
time, its costs are lower compared with the Danish model. However, not all countries could be 
expected  to  converge  towards  the  German  benchmark.  For  several  Member  States,  this 
convergence  would  imply  a  significant  increase  in  costs  for  supervisors.  Many  jurisdictions 
could rather be  expected to  converge half way, the extent of the convergence depending on 
the  chosen  option.  For  example,  there  are  jurisdictions  such  as  Austria,  Cyprus,  the  Czech 
Republic, Italy and Slovakia, where supervision is carried out by the banking supervisor and 
is  embedded  in  the  general  supervision  of  the  issuing  credit  institution.  Their  costs  can  be 
estimated  to  be  low  and  mingled  with  the  costs  of  the  overall  banking  supervision. 
Converging towards the benchmark would entail significant costs for those jurisdictions. The 
same  holds  for  Member  States  with  non-existing  covered  bond  markets.  Specific  resources 
would need to be dedicated to perform the duties and tasks of a special public supervision on 
covered bonds along the lines of the harmonisation framework. The size of the increase would 
depend on the chosen option.  

Under  the  baseline,  jurisdictions  are  expected  to  stick  to  their  country  model,  therefore  no 
convergence would be expected to take place towards the benchmark supervisory models.  

In  the  remainder  of  the  Section,  the  different  options  are  assessed  as  regards  i)  their 
effectiveness in achieving the stated objectives, and ii) their efficiency in terms of costs that 
are incurred while achieving them. 

5.2.  Option 1 – Non-regulatory option 

Under this option, harmonization would be encouraged on a voluntary basis through the use 
of soft tools such as the issuance of recommendations by the Commission. There would be no 
legislative action.  

5.2.1.  Benefits 

Direct benefits  

GO1  -  Specific  objective  1:  without  a  coherent  legislation  establishing  a  framework  for 
covered bonds at EU level, Member States would decide voluntarily whether or not to comply 
with recommended best practices. Member States with no framework in place could choose to 
stay without. According to the EBA 2016 Report, there are seven Member States that could be 
expected  to  take  legislative  action.  They  are  the  countries  with  amendments  in  progress  (4: 

83   ICF, 2017, Annex 6. 

49 

 
                                                 
CZ, FR, EL, SK) and countries with legislation on hold pending a Commission decision on 
whether or not to propose legislation (3: AT, IE, ES). To this, one could add the three Baltic 
countries  (EE,  LT,  LV)  plus  Croatia  who  have  recently  decided  to  set  up  a  legislative 
framework. In total, one could expect 11 countries to take action in order to comply with the 
EBA  best  practices.  The  size  of  benefits  in  terms  of  additional  issuance  and  lower  costs  of 
funding for banks and for the real economy could be expected to be around one third of the 
benchmark.84 This would be lower than for the other options. 

GO1 - Specific objective 2: little investor base diversification would be expected except for 
the  indirect  consequence  of  the  tapering  of  the  ECB  purchasing  programme  (see  baseline 
scenario). However, this benefit will not be compounded by the benefit of a unified market. 
Therefore no additional benefit compared to the baseline is expected. 

GO1  -  Specific  objective  3:  cross  border  investments  would  likely  stay  close  to  or  slightly 
above the current level with slight improvements in some countries such as the Baltics if they 
deliver  a  common  legal  framework  compliant  with  the  best  practices.  However,  this  would 
represent a small percentage of the benchmark. Therefore, additional benefits compared to the 
baseline could be expected to be small.  

GO1  -  Specific  objective  4:  third-country  investments  would  likely  stay  the  same.  There 
would be no common third  country regime (including equivalence provisions). The benefits 
of  reciprocally  recognising  equivalence  between  third  countries'  regimes  and  the  EU  (as 
spelled out for option 2) would therefore not be achieved.  No benefit expected compared to 
the baseline. 

GO2 - Specific objective 1: the benefit of aligning the structural characteristics of the product 
with  prudential  regulation  at  EU  level  would  depend  on  the  number  of  Member  States  that 
take  action  to  comply  with  recommended  best  practices.  If,  as  noted  above,  Member  States 
expected to comply were 11 out of 27, this would not fully address the prudential concerns. 
Some benefits would be achieved compared to the baseline, but they would likely be small. 

GO2 - Specific objective 2: the CRR preferential capital treatment would not be changed. No 
benefit expected compared to the baseline. 

GO2 - Specific objective 3: the treatment of new liquidity structures (soft bullets and CPT) 
would  depend  on  Member  States.  In  absence  of  Member  State  intervention,  contractual 
agreements or market standards could fill the void. The size of benefits would depend on the 
number of stakeholders choosing to comply and on the alignment between market standards 
and EU recommendations.  

Indirect benefits  

Leaving any adjustment to the discretion of Member States has the advantage of avoiding any 
possible  disruption  to  national  regimes  that  currently  work  well  and  the  associated  costs  to 
that disruption.  

84   Considering  proportionality  in  this  case  has  significant  limits,  however  it  can  be  considered  acceptable  a 
slightly lower than proportional effect as the group of countries is more biased towards small markets. 

50 

 
                                                 
5.2.2.  Costs 

As  it  is  difficult  to  predict  how  many  Member  States  would  decide  to  comply  and  to  what 
extent, a quantification of costs would be difficult. What could be reasonably inferred is that 
one would expect lower costs than under the other options. 

Direct costs 

Under option 1, the costs of setting up and running a covered bond programme would not be 
expected to change significantly compared with the baseline, as Member States would likely 
tend to preserve the status quo and eventually change it only gradually. As they would only 
act on a voluntary basis, Member States would not be expected to significantly increase costs 
in their markets. Under this option, out of the 11 Member States expected to take action, four 
(CZ, FR, EL, SK) are not undertaking changes that would significantly modify their current 
structure of one-off costs and recurring costs, while the other eight (AT, EE, ES, HR, IE, LT, 
LV)  would  be  expected  to  converge  towards  one-off  and  recurring  benchmark  costs.  They 
include  Spain,  where  costs  could  be  expected  to  change  significantly  if  action  is  taken  to 
comply  with  EBA  best  practices.  Overall,  this  would  result  in  a  move  towards  around  one 
third of the benchmark. Due diligence costs for investors would be expected to stay the same. 
As there would be no changes to the CRR framework, there would be no transitional costs or 
additional burden on investors from adapting to new capital rules. Banks investing in covered 
bonds  would  avoid  the  costs  of  having  to  adapt  to  a  new  regulatory  environment,  while 
supervisors would not have to adopt new supervisory approaches.  

Enforcement costs 

Supervisory  costs  borne  by  public  authorities  as  a  result  of  monitoring  activities  in  each 
national  jurisdiction  would  not  significantly  change  compared  to  the  baseline,  as  Member 
States  would  likely  tend  to  preserve  the  status  quo  and  eventually  change  it  only  gradually. 
This could be different in Spain. However, as option 1 is based on voluntary harmonization, it 
is not easy to predict to what extent changes introduced in that jurisdiction would comply with 
EBA  best  practices  and  how  much  they  would  contribute  to  increase  supervisory  costs. 
Overall,  a  slight  convergence  could  be  expected  to  take  place  towards  the  benchmark 
supervisory costs. 

Indirect costs 

Leaving  the  development  of  covered  bond  standards  across  the  EU  to  Member  States  and 
market-led initiatives, presents the risk of covered bonds' structural characteristics diverging 
and  hence  does  not  fully  address  the  prudential  concerns.  This  may  undermine  the 
international credibility of EU covered bonds and could result in a rethink by EU regulators 
on  the  requirements  and  modalities  of  their  preferential  treatment.  Downsizing  or  repealing 
the  preferential  prudential  treatment  could  lead  to  disruptions  in  existing  well-functioning 
national markets and to costs for issuers in terms of increased interest rates (see section 4.6). 

5.2.3.  Overall assessment 

Effectiveness, efficiency, coherence 

The extent to which the stated objectives and related benefits would be accomplished depends 
on Member States' willingness to follow best practices. It would be up to them and banks to 
decide  whether,  when  and  how  to  implement  the  recommendations/guidelines.  Even  if 
Member  States  were  to  react  quickly  and  introduce  national  legislation,  a  soft  law  action 

51 

 
would  limit  considerably  the  scope  and  depth  of  national  initiatives.  Moreover,  without  a 
coordinated effort, national initiatives are more likely to develop in different ways, potentially 
creating  a  set  of  different  provisions  and  standards  across  the  EU.  This  would  change  little 
compared to the current situation. As such, the incentive to issue and invest in covered bonds 
would remain limited to those Member States where markets already work well. At the same 
time,  market-led  mechanisms  cannot  guarantee  the  prudential  treatment  attached  to  covered 
bonds and without supervisors' overview, those standards would risk deviating in their content 
from what would be advisable from a prudential point of view. This option would minimize 
adaptation  costs.  However,  low  costs  would  be  accompanied  by  low  effectiveness  in 
achieving  the  stated  objectives,  thereby  suggesting  this  option  would  be  scarcely  efficient. 
The  efficiency  gained  in  the  short-term  by  avoiding  legislative  action  and  minimizing 
adaption costs is outweighed in the longer term by the foregone benefits of a more coherent 
EU regime. Overall, the option would not guarantee the achievement of the objectives of the 
review in an effective, efficient and coherent way. 

Winners and losers 

On  the  basis  of  the  above,  Table  6  summarises  the  benefits  and  costs  of  option  1  for  each 
category of stakeholders. Issuers would benefit from a partial lowering of funding costs and 
citizens would enjoy in their turn some lower borrowing costs as well. Costs would increase 
up  to  a  limited  measure  for  issuers  and  supervisors,  while  for  investors  and  society  no 
significant increase in costs is foreseen. 

Table 6 – Impacts on different stakeholders of Option 1   

Issuers 

Investors 

Supervisors 

Citizens 

Benefits 

Costs 

↑ 

↑ 

Stakeholder views 

≈ 

≈ 

≈ 

↑ 

↑ 

≈ 

While  at  the  beginning  of  the  consultation  process,  a  majority  of  market  stakeholders  (in 
particular  issuers)  was  in  favour  of  this  option,  after  the  EBA  Report  has  been  published, 
clarifying  the  contours  of  a  possible  EU  legislative  initiative,  only  a  minority  of  market 
stakeholders  remained  in  favour  of  this  option.  The  majority  of  them  shifted  towards 
supporting  minimum  harmonisation  (option  2),  as  illustrated  by  the  ECBC  position. 
Moreover,  option  1  is  not  favoured by  a  large majority  of  institutional  stakeholders  such  as 
the  EBA,  the  ECB,  the  Parliament,  national  and  European  supervisors.  In  addition  many 
stakeholders, not  only institutional ones,  manifested their concern  that market-led initiatives 
even  if  valuable  could  prove  insufficient  because  they  cannot  be  imposed  on  participants. 
While  industry  stakeholders  consider  the  European  "Covered  Bond  Label"  a  step  towards 
better  integration  of  the  covered  bond  markets,  most  acknowledge  that  there  are  certain 
limitations  to  self-regulation,  for  example  the  fact  that  voluntary  arrangements  cannot  form 
the basis for a specific regulatory treatment so need to be complemented by sound regulatory 
treatment  at  national  or  European  level.  Among  Member  States  with  the  largest  and  well-
established  markets,  France  and  Sweden  used  to  be  the  two  countries  most  sceptical  of 
legislative action and most in favour of the non-legislative option. 

52 

 
 
 
5.3.  Option 2 – Minimum harmonization based on national regimes 

Under this option, a legal harmonized framework for covered bonds would be established at 
EU level. This EU framework would aim at a minimum level of harmonization across the EU, 
building  on  the  characteristics  of  existing  national  jurisdictions  and  seeking  to  avoid 
disrupting  well-functioning  markets.  Under  this  option,  the  previous  Article  52  of  UCITS 
would be replaced by a new Directive defining the structural elements of covered bonds and 
Article 129 CRR would also be adjusted. 

5.3.1.  Benefits 

Direct benefits 

GO1 - Specific objective 1: this option would imply mandatory national implementation of 
the  objectives  set  out  in  the  minimum  harmonisation  EU  framework.  All  Member  States 
would  have  to  legislate  in  order  to  introduce  a  covered  bond  framework  or  to  adapt  the 
existing one to the requirements set out in the EU directive. This means achieving in full the 
benchmark  benefit  in  terms  of  number  of  countries  adopting  a  covered  bond  framework. 
However,  the  risk  remains  that  the  directive  is  not  implemented  completely,  or  that  the 
national implementations leave a significant heterogeneity in the market given that Member 
States  have  a  degree  of  discretion  in  how  to  implement  the  requirements  set  out  in  the 
Directive.  It  is  reasonable  to  expect  that  once  a  coherent  legislation  is  in  place  in  each 
Member  State  along  the  lines  of  the  Directive,  this  would  stimulate  the  development  of 
covered bond markets also in countries where currently they don't exist yet. The benchmark in 
terms of additional amount of covered bond issuance could be fulfilled if not fully, then to a 
large extent (one could expect between 50% and 75% of the maximum long-term benefit).  
As reported in section 2.2, a national legislative framework for covered bonds is one of the 
main  factors  at  the  base  of  the  development  of  a  florid  covered  bond  market.  This  is  also 
corroborated by anecdotal evidence. A case in point is Poland which did not have a covered 
bond market in the past, despite favourable economic conditions.85 Another non-EU example 
where  the  development  of  a  proper  legislation  has  fostered  the  birth  and  development  of  a 
florid covered bond market is Canada.86   
Increasing the share of covered bond issuance, relative to unsecured debt, would help banks to 
lower  the  cost  of  their  funding,  again,  achieving  a  large  share  of  the  estimated  benchmark 
(between 50% and 75% of the maximum long-term benefit).  
The impact of an EU directive will not only be felt in less developed markets, but also in well-
functioning ones. Among the latter, a direct benefit that could stem from the EU directive is 
the  improvement  in  the  credit  characteristics  of  the  instrument  that  would  lead  to 

85   This  was  due  to  an  outdated  legal  framework  that  lacked  important  structural  features  for  investors' 
protection and was  not aligned with  EU  standards. The EBRD provided  technical  assistance  to  the Polish 
Ministry  of  Finance  to  develop  new  covered  bond  legislation  to  update  the  old  one  and  align  it  with 
European standards. The changes came into effect in 2016 and have been essential to foster covered bond 
issuance  by  Polish  issuers  allowing  Polish  banks  to  lower  their  reliance  on  deposits  and  on  Western 
European  parent  companies.  Currently,  the  Polish  market  stands  at  €2.2  bn  of  outstanding  covered  bonds 
having almost doubled between 2015 and 2016 from €1.3 bn.  

86   In June 2012, the Canadian government approved covered bond legislation, providing a legal framework for 
its  biggest  banks  to  tap  the  market.  Canadian  banks  flocked  to  issue  covered  bonds  in  euros  and  dollars 
which now represent an important source of capital flows into the country’s housing market. Covered bonds 
now finance nearly 10 per cent of the entire Canadian mortgage market, which is close to C$1.4tn in size, 
according to the Canada Mortgage and Housing Corporation. That proportion was 5 per cent in early 2013 
and almost nothing in 2007. 

53 

 
                                                 
improvements  in  their  ratings  and,  therefore,  to  lower  financing  costs  for  issuers  (see 
benchmark c). The specific benefit for the countries where covered bond markets are already 
well developed has been estimated by the Commission to amount to €1.1 bn annually. This 
figure has to be intended as part of the total benchmark benefit c). 

Expanding  the  scope  of  covered  bond  markets  is  not  only  to  be  intended  from  the 
geographical  perspective,  but  also  in  terms  of  issuers'  characteristics.  The  new  framework 
would introduce measures to allow the use of pooled covered bond structures and encourage 
the issuance by smaller banks.  

GO1 - Specific objective 2: investor base diversification in line with the benchmark of 60%, 
could be reasonably achieved not only as an indirect consequence of the tapering of the ECB 
purchasing  programmes  as  suggested  in  the  baseline.  Introducing  mandatory  strengthened 
requirements  and  more  transparency  for  covered  bonds  would  make  the  product  safer  and 
more attractive for more risk adverse investors such as asset managers, insurers and pension 
funds.  At  the  same  time,  harmonizing  the  market  would  make  the  product  more  easily 
understandable and more liquid, attracting further all types of investors.  

GO1 - Specific objective 3: it can be expected that harmonisation through legislative means 
could  encourage  and  facilitate  additional  cross-border  investments.  While  it  is  difficult  to 
predict  to  what  extent  the  73%  benchmark  (see  benchmark  f)  would  be  achieved,  an 
improvement  in  that  direction  could  be  expected  compared  to  the  baseline.  In  addition,  an 
improvement  also  in  terms  of  diversification  of  EU  investors'  geographic  base  in  domestic 
markets could be expected as national systems would become more similar. This would be an 
advantage  also  for  a  well-established  market  like  Germany  which  currently  is  the  main 
investor not only in its domestic market but is also the main foreign investor in the EU with 
55% of all investments in the Union. Enlarging the choice of markets where German investors 
can  find  instruments  of  a  similar  credit  quality  to  their  Pfandbrief,  would  provide  more 
investment opportunities for them and will help lower concentration risks. 

Another  dimension  of  the  cross-border  objective  is  related  to  cover  pools  which  should 
comprise assets coming from across the EU. Removing legal obstacles to cross-border cover 
pools, could increase their significance. This would be particularly relevant in small Member 
States where the small scale of mortgage operations may necessitate cross-border cover pools. 
For  example  cross-border  banks  will  be  able  to  lend  to  residents  of  small  countries  and 
include their mortgages in their cover pools. Moreover, pooling mortgages across geographies 
would  represent  a  cost-efficient  way  to  fund  mortgages,  offering,  at  the  same  time, 
diversification to investors.  

GO1 - Specific objective 4: it could be expected that a harmonized framework at EU level 
would reduce due diligence costs for third-country investors. Differences in legal frameworks 
across EU jurisdictions require greater investment in credit analysis and legal research to be 
able to analyse country-specific products. Increased comparability and transparency deriving 
from a legally harmonised framework may enhance third country investors' confidence in EU 
covered bonds and contribute to foster their investments in the European market. In addition, 
where third countries have similar covered bond frameworks in place, an equivalence regime 
might be envisaged for reciprocal recognition of preferential prudential treatment. If the EU 
preferential treatment is granted to covered bonds issued outside the EU, this would broaden 
the scope of EU investors' possibilities, providing more attractive risk/reward propositions for 

54 

 
them87. If, at the same time, third countries which have in place preferential treatment similar 
to  the  European  one,  decide  that  covered  bonds  issued  in  the  EU  are  eligible  for  their 
preferential  treatment,  this  would  open  new  markets  for  European  banks  selling  covered 
bonds outside the EU. As the experience with the introduction of LCR favourable treatment in 
2015  suggests,  the  fact  itself  of  granting  preferential  treatment  may  foster  an  increase  in 
investments of significant size88. Finally, the new EU covered bond framework may represent 
a  benchmark  at  global  level,  providing  third  country  regulators  with  a  blueprint  to  further 
develop their own legal frameworks. All these elements could contribute to the achievement 
of  a  significant  portion  of  the  benchmark  of  16.5%  of  third  countries  investments  in  EU 
covered bond markets. This could translate into up to €115 billion of additional investments in 
EU covered bond markets coming from outside the EU on a long term multi annual horizon. 

GO2 - Specific objective 1: a legal harmonization along the lines of the EBA report would be 
beneficial in terms of an improved coherence between covered bond structural characteristics 
and  covered  bond  preferential  treatment  at  EU  level.  This  would  solve  concerns  on  the 
alignment between the structural characteristics of the product and the preferential treatment. 
Moreover, this coherence would strengthen the international credibility of EU covered bonds 
regime.  This  would  be  particularly  beneficial  for  well-established  markets  which  make 
significant use of the preferential provisions in EU legislation. 

GO2  -  Specific  objective  2:  Eligibility  conditions  for  CRR  preferential  treatment  would  be 
strengthened. Strengthening the credit characteristics  of the instrument will provide benefits 
for  investors,  but  it  would  also  translate  into  additional  costs  for  issuers.  While  costs  and 
benefits for the two categories may cancel each other out, the final outcome of a more stable 
and financially sound market for covered bonds and the resulting financial stability of funding 
for EU banks translate into a net gain of welfare for the society at large. 

GO2 - Specific objective 3: some rules would be introduced to define principles that must be 
respected  in  order  for  a  soft  bullet/CPT  covered  bond  to  be  recognized  compliant  with  the 
European  definition  of  covered  bond  as  envisaged  in  the  directive.  This  would  guarantee 
coherence  between  the  new  features  and  the  preferential  treatment  granted  to  all  covered 
bonds,  including  soft  bullets  and  CPT.  At  the  same  time,  liquidity  requirements  would  be 
introduced  in  the  directive,  while  implementing  details  would  be  left  to  Member  States.  As 
the  extendible  maturity  structures  (soft  bullets  and  CPT)  affect  the  extent  of  liquidity  risk, 
Member States could choose to use those structures as partial substitutes of liquidity buffers. 
This  could  result  in  a  situation  where  issuers  would  have  the  option  to  choose  between 
adopting extensible maturity structures and applying a liquidity buffer to the cover pool.  This 
choice  could  reasonably  trigger  a  conversion  of  a  share  of  hard  bullets  into  extendible 
maturity structures. Even if it could be reasonably expected that this conversion would happen 
in those countries where liquidity requirements are currently not in place89, an estimate of the 
share of the conversion is difficult to predict. The change in structures may not have a major 
impact  in  terms  of  pricing,  as  currently  the  hard/soft  bullet  distinction  does  not  represent  a 
strong  driver  of  prices90.  Indeed,  the  one-off  cost  of  converting  such  bonds  for  issuers  was 

87   For example, the lower correlation of non-EU covered bonds to an existing portfolio of EU issued covered 

bonds is an important contribution to stability, in particular for bank treasury investors. 

88   The 18% increase in issuance between the years 2014 and 2015 is partly due to the entry into force of the 

LCR requirements the same year. 

89   Countries  where  a  liquidity  requirement  rule  is  in  place  are  9:  Belgium,  Cyprus,  Denmark,  France, 

Germany, the Netherlands, Poland, Romania and Slovenia.  

90   ICF (2017), pp. 101-103; EMF and ECBC, 2017, Market Insights & Updates, February 2017, p. 6 

55 

 
                                                 
reported at 0.05 per cent (the standard fee paid recently by several covered bond issuers when 
requesting  bondholder  consent  for  such  a  conversion),  while  the  spreads  on  covered  bonds 
with extendible structures do not appear as systematically different from hard bullet structures 
in the current context. The main costs in terms of increased risks would concern investors, as 
this shift  of issuance towards  the new liquidity structures would imply a significant  shift  of 
the liquidity risk from the issuer to the investor. One cannot exclude therefore that the yield 
differentials  on  covered  bonds  with  extendible  structures  could  become  more  material  in 
times of systemic stress. 

Having a definition in place at EU level for the new structures and setting out principles for 
how to  manage the interaction between  liquidity buffers and extendible structures would be 
important for keeping risks under control.  

Indirect benefits 

In  terms  of  overall  savings  in  funding  costs  for  the  real  economy,  a  significant  portion 
(between  50%  and  75%)  of  the  benchmark  of  between  €1.5  bn  and  €1.9  is  expected  to  be 
achieved under this scenario. 

Another  indirect  benefit  of  introducing  a  covered  bond  legislative  framework  could  be  a 
reduction in pro-cyclicality in bank funding. This reduction would be the result of conflicting 
forces. There are some characteristics of covered bonds that go in the direction of increasing 
pro-cyclicality: 

  In  good  times,  covered  bonds  could  contribute  to  feed  the  demand  for  real  estate  and 
through this channel to inflate real estate bubbles. For example, right now in Canada the 
booming  real  estate  is  also  sustained  thanks  to  covered  bonds  which,  since  their 
introduction, have contributed to finance an increased share of the mortgage market; 

  Requirements of minimum over collateralisation are pro-cyclical. In scenarios of declines 
in  property  prices,  the  sources  available  to  fund  over  collateralisation  may  prove 
inadequate.  If  over  collateralization  is  mandatory  to  maintain  the  covered  bond  label, 
increasing pressure to add collateral to the cover pool may contribute to decreasing banks' 
lending capacity. 

However, especially in  adverse  market scenarios, covered bonds still show less  pro-cyclical 
features than alternative funding sources: 

  Values  of  the  assets  in  the  cover  pool  are  not  marked  to  their  market  value  on  a  regular 
basis.  Mortgage  cover  pools  backing  covered  bonds  are  only  ‘marked  to  market’  to  the 
extent that a house price depreciation causes a deterioration in LTV ratios. LTV ratios are 
the only link through which a decline in real estate prices can affect the cover pool. Only in 
this case, banks would be required to substitute assets in the cover pool; 

  As illustrated during and after the financial crisis, covered bonds proved to be a less pro-
cyclical  source  of  funding  for  banks  than  unsecured  debt.  Covered  bonds  proved  to  be 
relatively  price  stable  whereas  the  volatility  of  senior  unsecured  debt  issued  by  financial 
institutions has been much higher. While unsecured lending completely dried up, covered 
bond markets remained open for business. 

Under  option  2,  LTV  limits  and  overcollateralization  requirements  (the  main  pro-cyclical 
components  of  covered  bonds)  will  only  be  envisaged  for  eligibility  criteria  under  CRR  art 
129,  while  no  LTV  limit  or  overcollateralization  requirement  would  be  envisaged  in  the 

56 

 
directive,  in  line  with  the  EBA  advice.  In  this  way,  in  times  of  stress  and  of  declining  real 
estate  prices,  the  worst  consequence  could  be  the  loss  of  the  eligibility  for  the  capital 
preferential  treatment.  However,  the  instrument  would  remain  in  the  realm  of  the  general 
covered  bond  definition  as  a  fall  out  option,  limiting  negative  consequences  for  banks  and 
pro-cyclicality effects. 

Overall,  under  option  2,  the  aspects  of  counter  cyclicality  would  prevail  and  this  would 
translate into an indirect benefit. 

5.3.2.  Costs 

Direct costs 

Under option 2, it would be reasonable to expect that costs increase more significantly than 
under option 1. Adaptation costs may arise from: 

  Existing  bonds  and  programmes  would  need  to  be  grandfathered.  However,  new  rules 
would likely, in most cases, be accommodated within existing covered bond programmes. 
Largest  markets  with  largest  issuances  would  reasonably  minimize  changes  to  existing 
programmes  in  their  national  legislation.  In  addition,  most  of  the  amendments  foreseen 
under this option would increase bond holder protection and, therefore, can be expected to 
obtain their consent (where this is needed) or can be changed without causing controversy. 
Therefore,  we  wouldn’t  expect  these  costs  be  significant,  apart  for  some  exceptions  (see 
below the case of Spain); 

  One-off costs for issuers to manage the transition to the new set of rules. These would take 
the form of administrative costs for implementing the changes, for example as a result of 
changing legal documentation or amending IT systems or requiring additional legal advice 
or  credit  rating  valuations.  It  is  likely,  that  these  one-off  costs  would  be  higher  in  those 
countries  which  currently  enjoy  lower  upfront  costs,  as  they  would  have  to  align  with  a 
new  system  more  similar  to  the  high-cost  model.  For  example,  according  to  market 
stakeholders,  potential  one-off  costs  to  adapt  IT  systems  to  meet  the  new  EU  level 
transparency  requirements  would  range  between  zero  and  €500,00091  depending  on  the 
jurisdiction. 

One-off  direct  costs  for  setting  up  a  covered  bond  programme  would  then  be  expected  to 
converge towards the range of between €590,000 and €1.8 million (see benchmark). It could 
be estimated that countries with lower direct one-off costs will move in the direction of high-
cost  countries  as  under  option  2  there  will  be  a  convergence  towards  the  strongest  credit 
characteristics  of  the  most  developed  and  high-cost  markets.  At  the  same  time,  high-costs 
jurisdictions are not expected to decrease their one-off costs. 

Recurring direct costs would be expected to converge towards the range of between €300,000 
and €475,000 per jurisdiction. They might result from increased audit and management fees, 
payment of  a  fee to  a cover pool  monitor which did  not  exist before,  other  supervisory and 
regulatory new costs. These costs would presumably be higher wherever these features are not 
currently  envisaged.  For  example,  recurring  costs  would  increase  in  countries  where  cover 
pool  monitors are currently not  required. In  Finland, there is  currently no requirement  for a 

91   ICF, 2017, p.127 based on a survey of 67 stakeholders (mainly issuers) carried out in February 2017. 

57 

 
                                                 
cover  pool  monitor  and  its  introduction  could  cost  up  until  €576,000  per  year92.  In  general, 
even  when  the  cover  pool  monitor  is  required,  new  rules  enhancing  his  competences  and 
duties could on average increase his costs by 10-20% which would translate into incremental 
recurring  costs  ranging  between  €2.4  and  €4.8  million  across  the  EU93.  Another  example  is 
provided  by  supervisory  and  regulatory  costs  which  would likely  increase  in  those Member 
States where supervision is currently following a "light touch" approach. In those countries, 
increasing costs for supervision would be likely paid by issuers. For example, in Austria, the 
Czech Republic and Italy, the introduction of programme licensing arrangements could cost 
issuers up to €1 million.94  

Direct costs are not expected to increase for issuers as a consequence of introducing the EU 
label for covered bonds. As explained in section 4.3, issuers would be able to (voluntarily) use 
this  label  when  marketing  their  bonds,  provided  that  the  product  complies  with  the 
requirements  set  out  in  the  directive.  As  no  additional  labelling  process  or  monitoring  of 
compliance is envisaged, extra direct administrative costs are not expected to arise for issuers. 

Spain would be the most affected EU country. Under option 2, the Spanish covered bond law 
would  need  to  undergo  substantial  changes,  particularly  concerning  the  establishment  of  a 
cover pool, the segregation of the cover assets and new transparency requirements. There are 
two  particular  features  of  the  current  Spanish  law  that  are  problematic  in  relation  to  the 
objective of minimizing transition costs: 

  Covered bond holders have a claim over the entirety of the eligible assets held by the bank. 
A new law establishing a cover register would directly contradict this in that it takes assets 
away from the existing covered bond investors; 

  The statutory over-collateralisation is exceptionally high (25 per cent for mortgage covered 
bonds). Under option 2, this number would likely be reduced but this would be detrimental 
to existing bondholders. Any enforced change that could be seen to be detrimental to bond 
holders  would  generate  potentially  substantial  legal  issues  and  increase  grandfathering 
costs.  

Any  transition  arrangements  in  Spain  are  further  complicated  by  the  very  high  number  of 
bonds  outstanding,  the  high  number  of  programmes  (40),  their  diverse  formats  and  the  fact 
that the last final maturity of a bond issued under the current law is 2046. Moreover, Spanish 
banks are more reliant on covered bond funding than other countries' banks. However, costs 
come with benefits as well. The new features envisaged under the directive would be credit 
positive for Spanish covered bonds and this would help lowering their interest rates and the 
required level of overcollateralization by credit rating agencies (currently rating agencies ask 
up  to  157%  of  overcollateralization  for  Spanish  covered  bonds  to  compensate  for  the 
perceived weaknesses in their regulatory framework). Another positive element would be the 
implementation of a soft LTV limit which could replace the current hard LTV limit and would 
therefore allow Spanish banks to increase the pool of eligible assets and to issue more covered 
bonds.  Finally,  clarifying  the  final  outcome  of  the  process  would  help  stakeholders  manage 
the transition smoothly. Until now the Spanish Treasury carried out consultations on potential 

92   Nine programmes multiplied by the European average cost of a cover pool monitor of €64,000. Source: ICF, 
2017, p. 112. However, cover pool monitor tasks could be attributed to the competent authority. In this case, 
costs would be borne by the supervisor. 

93   In 2015, there were 371 covered bond programmes in EU Member States. Source: ICF, 2017, p.112. 
94   ICF, 2017, p.115. €13,000 average licencing costs across EU multiplied by the 79 programmes existing in 

the mentioned countries. 

58 

 
                                                 
changes  on  the  legal  framework  without  reaching  any  clear  conclusion  and  this  prolonged 
uncertainty is starting to negatively affect the market.  

While  costs  are  expected  to  increase  for  issuers  under  option  2,  the  same  does  not  apply  to 
investors.  The  credit  enhancing  features  of  rules  foreseen  under  option  2  would,  on  the 
contrary, lower due diligence costs for investors and turn into a benefit for them.  

Enforcement costs 

Supervisory costs borne by public authorities as a result of monitoring activities would change 
compared to  the baseline especially for those Member States where  supervision is currently 
following  a  light  touch  approach.  In  five  EU  jurisdictions  (Austria,  Cyprus,  the  Czech 
Republic, Italy and Slovakia) the system of supervision does not match the requirements that 
a  new  EU  law  would  define  under  option  2.  In  Austria,  the  Czech  Republic,  Italy  and  
Slovakia  covered  bond  programmes  do  not  need  to  be  approved,  in  Austria  the  framework 
does not set out the supervisor’s duties and powers, in Cyprus the supervisor does not have to 
review  operational  practices  as  part  of  the  approval  process.  In  all  those  Member  States, 
specific audits on the cover pool are not part of the supervisor's duties and tasks. Adapting the 
current supervisory system to the enhanced duties and powers that the new framework would 
envisage  for  supervisors  under  option  2,  would  imply  increasing  costs  for  light  touch 
jurisdictions  to  converge  towards  the  benchmark.  However,  those  jurisdictions  are  not 
expected to fully reach the benchmark under option 2 as Member States would likely use their 
space  of  manoeuvre  envisaged  under  this  option  to  minimize  the  increase  in  enforcement 
costs. To what extent benchmark costs will materialize will depend on the choices exercised 
by each Member State. 

Direct costs are not expected to increase for supervisors as a consequence of introducing the 
EU  label  for  covered  bonds.  As  explained  in  section  4.3,  supervisors  would  be  expected  to 
monitor compliance with the conditions under which such label could be legally used as part 
of  the  special  public supervision  of  the  covered  bond  framework.  An  ex-ante  control  of  the 
use  of  the  label  would not  be  necessary  and the  costs related  to  the  monitoring  of  the  label 
would be part of the enforcement costs discussed above.   

Indirect costs 

Introducing  or  amending  covered  bond  legislation  could  have  indirect  costs  for  unsecured 
creditors. This type of impact can be considered under two different angles: the legal and the 
economic  one.  Under  the  legal  perspective,  the  concept  of  dual  recourse  would  require 
Member States to acknowledge in their insolvency legislation the priority of the covered bond 
holder  on  the  cover  pool  and  his  pari  passu  claim  (vis-a-vis  unsecured  creditors)  on  the 
insolvency estate of the issuer. Two situations may arise:  

–  In those Member States where covered bond legislation is in place, national insolvency law 
has already been amended to implement the dual recourse principle. Indeed, this principle 
is the only one complied with by all Member States according to the EBA assessment of 
best  practices.  According  to  the  EBA  Report  2014,  a  majority  of  EU  jurisdictions  have 
introduced  bankruptcy  provisions  that  are  specific  to  the  event  of  default  of  the  covered 
bond issuer. Only Bulgaria, Finland and the Netherlands do not have any covered bonds-
specific  insolvency  provisions  embedded  in  their  legal  frameworks.  In  Germany  and 
Denmark, national rules regarding insolvency require that after bondholders are fulfilled by 
the  cover  pool,  the  remaining  collateral  is  transferred  to  the  issuer's  general  insolvency 
estate to serve unsecured creditors;   

59 

 
–  A slightly different situation may characterize those countries where currently there is no 
covered bond legislation in place. This situation would need some specific amendments to 
the insolvency law to accommodate the introduction of covered bonds and the related dual 
recourse principle.  

Overall,  the  legal  impact  of  the  introduction  of  the  directive  on  unsecured  creditors  and  on 
national  insolvency  law  should  be  very  limited  and  the  current  status  and  ranking  of 
unsecured creditors is not expected to worsen significantly in case of insolvency. 

Another aspect of the same problem is of economic nature and regards the fact that a credit 
institution increasing its issuance of covered bonds can affect unsecured creditors through the 
increased  level  of  asset  encumbrance.  It  has  been  argued  that  an  increase  in  the  number  of 
covered bonds issued has potentially adverse effects on the stability of the banking system as 
it reduces the assets available for unsecured bond holders and other creditors. This could lead 
to  a  lower  credit  rating  on  the  unsecured  bonds,  a  higher  yield  demanded  by  unsecured 
investors and, in extreme scenarios, more difficulties in refinancing maturing debt.95  

In response to this concern and following a specific request by the ESRB, since 2015 the EBA 
has  begun  to  collect  data  that  allow  an  assessment  of  the  actual  encumbrance  levels  and 
sources in the EEA banking system.96 According to the EBA, encumbered assets relative to 
total assets was 26.6% in December 2016.97 This represents a one percentage point increase 
compared with 2015, where the asset encumbrance ratio was 25.4%. The corresponding value 
for December 2014 was 25.1%. This modest uptick in the level of total asset encumbrance in 
2016 is not a cause of concern according to the EBA.  

Nevertheless,  large  and  established  covered  bond  markets  (most  notably  Denmark  and 
Sweden) show a high level of asset encumbrance. However, there are some qualifications: 

  Covered bonds do not represent the main source of asset encumbrance. Repos represent the 
single most important source of encumbrance at 27%, while covered bonds represent 21%;  
  The implications of the encumbrance level depend upon specific features of the domestic 
financial  market  and  the  business  models  of  the  credit  institutions.  The  high  level  of 
encumbrance in the Danish financial system is a function of the dominance of specialised 
mortgage  lenders  who  are  wholly  reliant  on  covered  bond  funding.  As  market  indicators 
show,  the  relatively  high  encumbrance  in  Denmark  compared  to  some  other  Member 
States is not reflected by a higher risk premium demanded by investors; and  

  According to the ECBC, covered bond encumbrance tends to be less pro-cyclical in times 
of turmoil than other forms of encumbrance.98 For example, collateral posted under repos 
is  typically  marked  to  its  market  value  on  a  regular  basis,  whereas  mortgage  backing 
covered  bonds  are  only  ‘marked  to  market’  to  the  extent  that  a  house  price  depreciation 
causes a deterioration in LTV ratios, thus covered bonds are far less volatile and less pro-
cyclical in an adverse market scenario.  

While an EU framework is expected to increase the use of covered bonds, and hence use of 
encumbered  collateral,  there  are  features  of  the  framework  that  could  mitigate  concerns 

95   Deutsche Bundesbank 2016).  
96   Data  provided  regularly  by  a  sample  of  196  banks  from  29  EEA  countries.  The  sample  covers  at  least  3 

banks from each country including all large ones. 

97   EBA (2017b).  
98   ECBC Position Paper on Asset Encumbrance, June 2013 

60 

 
                                                 
related  to  asset  encumbrance.  For  example,  some  of  the  requirements  envisaged  in  the  new 
framework should contribute to reduce over-collateralisation levels and therefore the level of 
asset encumbrance in the EU banking system. This would affect the statutory requirements of 
OC  in  national  legal  frameworks.  Currently,  they  vary  between  0  per  cent  and  25  per  cent 
across Member States99. The most frequently used values are 2 per cent (typically because this 
is  the  required  over-collateralisation  for  exemption  from  clearing  obligations  for  associated 
derivatives under EMIR) and 5 per cent. 12 Member States have OC statutory levels higher 
than 2% and 5 Member States have statutory requirements higher than 5%. As under option 2 
the  EU  framework  would  require  a  minimum  statutory  OC  level  of  between  2%  and  5% 
depending on the quality of the assets in  the cover pool, this could potentially contribute to 
lower  OC  levels  across  the  EU100.  Furthermore,  credit  rating  agencies  may  have  an  impact. 
Over-collateralisation levels required by rating agencies are typically high, especially where 
national  covered  bond  frameworks  are  considered  weaker  in  terms  of  investor  protection. 
Requirements  by  credit 
reach  100%  or  even  150%  of 
overcollateralization  in  those  jurisdictions  considered  weaker  by  investors101.  Strengthening 
investor protection across the EU might contribute to induce rating agencies to lower their OC 
requirements thus reducing aggregate encumbrance levels in the banking system for any given 
quantity of covered bonds outstanding.  

rating  agencies  could 

Securitization is not dissimilar from covered bonds in terms of effects on unsecured creditors. 
In both cases, exposures underlying the securitisation and the covered bond are not available 
to unsecured creditors and are reserved to investors in the securitisation/covered bond. Using 
these methods of funding do remove assets that otherwise would have been available to fulfil 
unsecured creditors. This is the risk of being unsecured which is also reflected in the pricing 
of unsecured debt compared to secured one. 

5.3.3.  Overall assessment 

Effectiveness, efficiency, coherence 

Overall option 2 is considered to achieve most of the objectives of the initiative at reasonable 
costs  by  combining  enough  flexibility  to  accommodate  Member  States  features  with  the 
objective of achieving coherence at EU level for covered bonds. This option would have the 
best  chance  of  being  effective  in  achieving  stated  objective,  while  at  the  same  time  being 
efficient,  minimizing  disruption  and  transition  costs.  Of  the  options  considered,  it  therefore 
represents the most efficient and effective way to address the problems envisaged in section 2.  

Winners and losers 

On  the  basis  of  the  above,  table  7  summarises  the  benefits  and  costs  of  option  2  for  each 
category of stakeholders. Issuers would benefit from a lowering of funding costs and citizens 
would enjoy in their turn some lower borrowing costs as well. Investors would benefit from a 
stronger  regime,  however  some  details  left  to  Member  States’  discretion  could  introduce 
weaknesses  (for  example  in  the  relationship  between  extendible  structures  and  liquidity 
buffer).  Costs  would  increase  for  issuers  and  supervisors,  while  they  would  decrease  for 
investors and society. 

99   In Spain, for example, the minimum regulatory OC is currently 25 per cent, or circa €70 billion. 
100   It is worth noting, however, that there is no intention to impose a constraint on national regulators wanting 
to set a higher level than the EU minimum. It is also worth noting that there is nothing to stop issuers setting 
higher levels of OC to preserve credit ratings or investor confidence. 

101   In Spain, credit rating agencies might ask up to 157% of overcollateralization to issuers. 

61 

 
                                                 
Table 7 – Impacts on different stakeholders of Option 2   

Issuers 

Investors 

Supervisors 

Citizens 

Benefits 

Costs 

↑↑ 

↑↑ 

Stakeholder views 

↑ 

↓ 

↑ 

↑ 

↑↑ 

↓ 

Option 2 is favoured by a large majority of stakeholders: institutional, supervisors, Member 
States  and  industry.  The  EBA,  the  ECB,  the  Parliament,  national  and  European  supervisors 
favour  this  option.  This  is  the  option  that  fits  with  the  EBA  Report  and  the  EP  Report.  A 
majority  of  Member  States  is  also  favourable  to  this  option,  including  all  those  with  the 
largest  markets.  In  particular,  Member  States  with  the  two  largest  and  well-established 
markets  such  as  DE  and  DK  are  favourable  to  this  option  as  they  see  in  the  legislative 
harmonization  the  opportunity  to  extend  the  soundness  and  stability  that  characterize  their 
markets to the rest of the EU. France and Sweden were initially the most sceptical and were 
more in favour of option 1, but they eventually converged on this option after the publication 
of the EBA Report. Italy and Spain would suffer the most significant increases in costs among 
the  largest  markets.  In  spite  of  this,  however,  both  countries  support  option  2.  Spain,  for 
example, is aware of the need to change the current covered bond framework and has carried 
out several consultations without reaching clear conclusions. The EU initiative is seen as an 
opportunity to provide clear guidance on the way forward and start delivering a long-awaited 
change. 

Industry is split between those who would prefer option 1 and those who would prefer option 
2,  while  no  support  at  all  is  given  to  options  3  and  4.  The  ECBC  representing  almost  all 
issuers  in  the  market  and  investors  is  clearly  in  favour  of  option  2.    According  to  a  survey 
conducted  by  ICF  in  February  2017  on  a  sample  of  65  stakeholders  (mainly  issuers)102,  a 
harmonised legislative framework for covered bonds at EU level along the lines of option 2 
would deliver the following benefits (in percentage the number of respondents agreeing): 

  Reduce regulatory fragmentation (74 per cent); 
  facilitate reduction in asset and liability mismatches (68 per cent); 
  improve  ease  and  quality  of  due  diligence  and  credit  analysis  of  covered  bonds  (lower 

barriers to invest) (60 per cent); 

  facilitate  developments  of  CB  framework  in  all  the  28  EU  countries  in  line  with  CMU 

agenda (60 per cent); 

  improve the efficiency of monetary policy transmission (higher availability of high quality 

collateral) (60 per cent) 

  facilitate capital market access to small-medium issuers (58 per cent); 
  reduce investors' reliance on external ratings (54 per cent).  

5.4.  Option 3 – Full harmonization 

This option would involve the design of a new fully harmonized regime for covered bonds. In 
doing so, it would need to define every detail of a sound covered bond regulatory framework 

102   ICF, 2017, pp. 50-51 

62 

 
 
 
                                                 
and would not thus follow a principle based approach. The legislative instrument envisaged to 
implement this option would be a regulation. 

5.4.1.  Benefits 

Direct benefits 

GO1 - Specific objective 1: as this option would entail a regulation to define covered bonds 
rather than a directive, it would be directly applicable to all Member States without having to 
wait for them implementing the directive and without bearing monitoring and implementation 
costs. Any risk of non-compliance with the directive would be eliminated. The full benchmark 
benefit  in  terms  of  number  of  countries  with  a  covered  bond  framework  in  place  would  be 
achieved  immediately  at  the  entering  into  force  of  the  regulation.  It  is  reasonable  to  expect 
that  once  a  compelling  regulation  is  in  place  across  the  EU,  this  would  stimulate  the 
development of covered  bond  markets also in  countries where  currently they don't exist  yet 
(see  explanation  provided  in  option  2).  The  benchmark  in  terms  of  additional  amount  of 
covered bond issuance is expected to be almost fully achieved (between 75% and 100% of the 
maximum  long-term  benefit).  Increasing  the  share  of  covered  bond  issuance  vs  unsecured 
debt,  would help banks  to  lower the cost of their funding achieving most  of the benchmark 
(between 75% and 100% of the maximum benefit). The impact of an EU regulation would not 
only be felt in less developed markets, but also in well-functioning ones. Among the latter, a 
direct benefit that could stem from the EU regulation would be the improvement in the credit 
characteristics  of  the  instrument  that  would  lead  to  higher  credit  ratings  and,  therefore,  to 
lower  financing  costs  for  issuers  (with  benefits  of  €1.1bn  of  yearly  savings  in  line  with 
calculations in benchmark c). 

Expanding  the  scope  of  covered  bond  markets  is  not  only  to  be  intended  from  the 
geographical  perspective,  but  also  in  terms  of  issuers'  characteristics.  The  new  regulation 
would introduce measures to allow the use of pooled covered bond structures and encourage 
the issuance by smaller banks.  

GO1 - Specific objective 2: investor base diversification in line with the benchmark of 60%, 
could be reasonably achieved not only as an indirect consequence of the tapering of the ECB 
purchasing  programmes  as  suggested  in  the  baseline.  Introducing  mandatory  strengthened 
requirements  and  more  transparency  for  covered  bonds  would  make  the  product  safer  and 
more attractive for more risk adverse investors such as asset managers, insurers and pension 
funds.  At  the  same  time,  a  full  harmonization  of  the  market  would  make  the  product  more 
easily understandable and more liquid, attracting further all types of investors,  

 GO1 - Specific objective 3: the fact that there would be no discretionary space for Member 
States  to  interpret  and  implement  norms  to  suit  their  specificities,  would  make  the  system 
more  homogenous  and  better  integrated  and  this  should  foster  further  cross  border 
investments. The 73% benchmark could be expected to be hit. In terms of cross-border cover 
pools similar considerations hold as under option 2. 

GO1 - Specific objective 4: full harmonization provided through a regulation would favour 
investments  from  third  countries,  would  foster  the  possibility  to  establish  an  equivalence 
reciprocal  regime  and  will  also  provide  all  jurisdictions  in  the  world  with  a  law  text 
representing  a  benchmark  at  global  level.  All  these  elements  would  contribute  to  the 
achievement of the benchmark of 16.5% of third countries investments in EU covered bond 

63 

 
markets. This would translate into up to €115 billion of additional investments in EU covered 
bond markets coming from outside the EU on a long term multi-year horizon. 

GO2 - Specific objective 1: a full harmonization along the lines of the EBA report, only more 
detailed,  would  be  beneficial  in  terms  of  coherence  between  covered  bond  structural 
characteristics  and  covered  bond  preferential  treatment  at  EU  level.  There  would  be  no 
discretionary  space  for  Member  States  to  interpret  and  implement  norms  to  suit  their 
specificities and this would better guarantee full coherence between covered bonds structural 
characteristics  and  their  preferential  prudential  treatment  at  EU  level.  Moreover,  under  this 
option, one could envisage the SSM also conducting the special supervision of covered bonds 
for  the  largest  banks  issuing  covered  bonds  in  the  euro  area.  This  would  further  strengthen 
homogeneity  in  the  way  rules  are  applied  and  enforced.  Benefits  of  comprehensive 
harmonization  would  therefore  fully  be  achieved  with  less  risks  of  divergence  than  under 
option  2.  Moreover,  this  coherence  would  strengthen  the  international  credibility  of  EU 
covered  bonds  regime.  This  would  be  particularly  beneficial  for  well-established  markets 
which make significant use of the preferential provisions in EU legislation. 

GO2  -  Specific  objective  2:  Eligibility  conditions  for  CRR  preferential  treatment  would  be 
strengthened in a way similar to option 2. While strengthening the credit characteristics of the 
instrument will provide benefits for investors, it would also translate into additional costs for 
issuers. While costs and benefits for the two categories may cancel each other out, the final 
outcome of  a  more stable and financially sound market for covered bonds and the resulting 
prudentially sounder funding for EU banks translate into a net gain of welfare for the society 
at large. 

GO2  -  Specific  objective  3:  rules  would  be  introduced  to  define  principles  that  must  be 
respected  in  order  for  a  soft  bullet/CPT  covered  bond  to  be  recognized  compliant  with  the 
European  definition  of  covered  bond  in  the  regulation.  This  would  guarantee  coherence 
between  the  new  features  and  the  preferential  treatment  granted  to  all  covered  bonds, 
including soft bullets and CPT. In addition, as the extendible maturity structures (soft bullets 
and CPT) affect the extent of liquidity risk, the regulation would define strict rules for how to 
manage the interaction between liquidity buffers and extendible structures instead of leaving 
this choice to Member States in order to keep risks under control.  

Indirect benefits 

In terms of overall savings in funding costs for the real economy, most of the benchmark of 
between  €1.5  bn  and  €1.9  (between  75%  and  100%  of  the  maximum  benefit)  could  be 
expected to be achieved under this option. 

Concerning the indirect effects in terms of pro-cyclicality, similar considerations hold as for 
option 2. Also under option 3, those features of covered bonds which favour pro-cyclicality 
such  as  LTV  limits  and  overcollateralization  requirements  would  only  be  envisaged  for 
eligibility criteria under CRR art 129, and excluded from the directive. In this way, in times of 
stress  and  of  declining  real  estate  prices,  the  worst  consequence  could  be  the  loss  of  the 
eligibility for the capital preferential treatment. However, the instrument would remain in the 
realm  of  the  general  covered  bond  definition  as  a  fall  out  option,  limiting  negative 
consequences  for  banks  and  pro-cyclicality  effects.  Overall,  under  option  3,  the  aspects  of 
counter cyclicality would prevail and this would translate into an indirect benefit. 

64 

 
5.4.2.  Costs 

Direct costs  

Under option 3, it would be reasonable to expect higher costs than under option 2, especially 
in  terms  of  one-off  adaptation  costs.  Option  3  would  indeed  impose  a  one-size  fits  all 
approach which would imply more significant changes in every jurisdiction than under option 
2.  Instead  of  a  principle  based  approach  which  could  be  adapted  to  different  national 
circumstances,  detailed  rules  will  need  to  be  specified  under  option  3  and  this  would  also 
entail a significant amount of level 2 legislation. The major impacts will be in terms of one-
off and transition costs: 

  Existing bonds and programmes would need to be grandfathered. While under option 2 it 
could  be  expected  that  national  legislators  would  aim  at  minimizing  transition  costs,  a 
regulation  introducing  more  radical  changes  compared  to  the  status  quo  would  increase 
significantly the costs of the transition and adaptation of the current programmes; 

  One-off costs for issuers to manage the transition to the new set of rules. These would take 
the form of administrative costs for implementing the changes, for example as a result of 
changing legal documentation or amending IT systems or requiring additional legal advice 
or credit rating valuations. These costs would presumably be higher than under option 2 as 
no  national  adaptation  would  be  possible.  For  example,  considering  that  market 
stakeholders  estimated  potential  one-off  costs  to  adapt  IT  systems  to  meet  the  new  EU 
level transparency requirements would range between zero and €500,000103, it is likely that 
under option 3 costs would be at the upper end of the range. 

One-off direct costs for setting up a covered bond programme are then expected to converge 
towards the upper bound of the range provided in the benchmark of €1.8 million. It could be 
estimated that countries with lower direct one-off costs will move in the direction of high-cost 
countries  as  under  option  3  there  will  be  convergence  towards  the  strongest  credit 
characteristics  of  the  most  developed  and  high-cost  markets.  At  the  same  time,  high-costs 
jurisdictions are not expected to decrease their one-off costs. 

Recurring direct costs are expected to converge towards the range of between €300,000 and 
€475,000  per  jurisdiction.  They  might  result  from  increased  audit  and  management  fees, 
payment of  a  fee to  a cover pool  monitor which did  not  exist before,  other  supervisory and 
regulatory new costs. These costs would presumably be higher wherever these features are not 
currently  envisaged.  Similar  examples  hold  as  for  option  2.  Similar  considerations  as  under 
option 2 are also valid for the case of Spain. 

While  costs  are  expected  to  sensibly  increase  for  issuers  under  option  3,  the  same  does  not 
apply to investors. The credit enhancing features of rules foreseen under option 3 would, on 
the contrary, lower due diligence costs for investors and turn into a benefit for them.  

For labelling costs, similar considerations hold as for option 2. 

Enforcement costs 

Supervisory  costs  would  increase  compared  to  the  baseline  especially  for  those  Member 
States where supervision is currently following a light touch approach. Adapting the current 
supervisory system to the enhanced duties and powers that the new regulation would envisage 

103   ICF, 2017, p.127 based on a survey of 67 stakeholders (mainly issuers) carried out in February 2017. 

65 

 
                                                 
for supervisors under option 3, would imply higher costs for light touch jurisdictions which 
would  reach  the  benchmark.  Similar  considerations  and  examples  hold  as  for  option  2. 
However, some additional costs would arise under option 3 compared to option 2. First of all, 
a  major  effort  in  terms  of  issuance  of  level  2  legislation  by  EU  bodies  would  be  needed  to 
allow a new detailed framework be fully up and running across the EU. Secondly, under this 
option  a  centralized  supervision  under  the  SSM  could  be  envisaged  for  the  largest  banks 
issuing covered bonds in the euro area. The shift of supervision from national authorities to 
the  SSM  would  imply  adaptation  and  organizational  costs.  Resulting  costs  would  be  borne 
both by the SSM and the national authorities. For labelling costs, similar considerations hold 
as for option 2. Overall, enforcement costs are expected to fully hit the benchmark.  

Indirect costs 

Introducing  or  amending  covered  bond  legislation  could  have  indirect  costs  for  unsecured 
creditors. This type of impact can be considered under two different angles: the legal and the 
economic one. Under both perspectives, similar considerations hold as for option 2, including 
the estimates of asset encumbrance. 

Option 3 would also present further indirect costs in terms of disruption of well- functioning 
existing  national  markets.  The  one-size-fits-all  approach  implicit  in  option  3  could  indeed 
hamper  the  functioning  of  several  EU  jurisdictions  and  could  potentially  undermine  well-
functioning  national  regimes  and  markets.  In  countries  where  covered  bond  markets  play  a 
fundamental  role  in  the  respective  economies,  disruption  in  covered  bond  markets  could 
potentially hamper the overall economy and financial stability of those countries.  Quantifying 
the costs of such a disruption is not possible with the data available. 

5.4.3.  Overall assessment 

Effectiveness, efficiency, coherence 

On the whole, this option would achieve the objectives of the initiative. A new covered bond 
regime along the lines of this option would constitute an integrated and coherent framework 
for  covered  bond  markets  compared  to  the  status  quo.  As  this  framework  would  include 
detailed proposals for every aspect of covered bond operations, there is no risk that Member 
States  might  not  implement  uniformly  the  rules  defined  in  EU  law.  However,  detailed 
harmonisation could have unintended negative consequences, especially for well-functioning 
markets,  neutralising  possible  benefits.  This  option  would  be  less  efficient  than  option  2  as 
transition  costs would be higher  and it would risk  damaging those markets  already working 
well, with unpredictable and difficult to estimate consequences. While benefits might turn out 
to  be  higher  in  the  long  term,  the  costs  in  the  short  to  medium  term  would  be 
disproportionately  high.  Therefore,  whereas  the  option  would  guarantee  effectiveness  and 
coherence, it would do so at high costs. 

Winners and losers 

On  the  basis  of  the  above,  table  8  summarises  the  benefits  and  costs  of  option  3  for  each 
category of stakeholders. Issuers would benefit from a lowering of funding costs and citizens 
would enjoy in their turn some lower borrowing costs as well. Investors would benefit from a 
stronger  regime,  while  supervisors  would  suffer  from  losing  some  of  their  competences  in 
favour  of  the  ECB.  Costs  would  increase  for  issuers  and  supervisors  up  to  the  maximum 
extent  of  the  benchmark,  while  they  would  decrease  for  investors.  Overall,  costs  would 
increase for citizens because of the risk of disruption of well-functioning markets. 

66 

 
Table 8 – Impacts on different stakeholders of Option 3   

Issuers 

Investors 

Supervisors 

Citizens 

Benefits 

Costs 

↑↑ 

↑↑ 

Stakeholder views 

↑↑ 

↓ 

↓ 

↑↑ 

↑↑ 

↑↑ 

A  large  majority  of  stakeholders  have  suggested  discarding  this  option.  Among  them 
institutional  stakeholders,  supervisors,  Member  States  and  industry  stakeholders.  The  EBA 
and the Parliament discarded this option as well. The totality of Member States opposes it, in 
particular  Member  States  with  well-established  markets.  All  the  largest  markets  indeed 
oppose this option (DE, DK, FR, ES, SE, IT). 

According  to  a  survey  conducted  by  ICF  in  February  2017  on  a  sample  of  65  stakeholders 
(mainly  issuers)104,  88  per  cent  of  the  respondents  think  that  the  main  risk  of  introducing  a 
covered  bond  framework  at  EU  level  would  be  the  disruption  of  well-functioning  national 
regimes and markets.  

5.5.  Option 4 – 29th parallel regime 

2. 
This option would be similar to option 3 with the difference that instead of substituting 
the  current  28  regimes  with  a  new  one  as  envisaged  in  option  3,  the  newly  created  regime 
would operate in parallel and compete with the existing 28 ones, becoming the 29th regime. 
Differently  from  option  3,  the  new  regime,  if  successful,  could  be  expected  to  gradually 
replace  the  existing  ones  instead  of  directly  superseding  them  from  the  outset.  This 
replacement would happen  on the basis of voluntary  adoption by actors in the market. Two 
sub-options  should  be  assessed105.  Sub-option  4.1:  the  system  is  neutral  with  no  specific 
incentives  for  issuers/investors  to  embrace  the  29th  regime.  Even  if  very  well  crafted  in 
compliance with all the EBA best practices, there is no reason to expect this regime will take 
off  in  well  established  markets  which  will  likely  continue  using  their  current  systems  and 
labels.  Smaller  countries  without  large  and  well-established  markets  would  instead  likely 
adopt  the  new  regime.  Sub-option  4.2:  to  make  the  29th  regime  attractive  relative  to 
established instruments, another option is to grant it a more favourable preferential prudential 
treatment. This has also been recognized by respondents to the public consultation. However, 
given that further strengthening the preferential regime of certain covered bonds would not be 
politically  acceptable,  granting  more  favourable  prudential  treatment  to  the  29th  regime 
effectively means repealing or reducing the preferential treatment of the existing regimes.  

5.5.1.  Benefits 

Direct benefits 

GO1 - Specific objective 1: as this option would entail a regulation to define covered bonds 
rather than a directive, it would be directly applicable to all Member States without having to 
wait for them implementing the directive and without bearing monitoring and implementation 
costs. Any risk of non-compliance with the directive would be eliminated. The full benchmark 

104   ICF, 2017, pp. 52-54. 
105 Estimated benefits and costs are normally to be intended for the general option, unless otherwise specified. 

67 

 
 
 
                                                 
benefit  in  terms  of  number  of  countries  with  a  covered  bond  framework  in  place  would  be 
achieved immediately at the entering into force of the regulation. However, differently than 
under  option  3,  Member  States  would  be  allowed  to  retain  existing  national  systems.  It  is 
reasonable to expect that also under option 4, once a compelling regulation is in place across 
the  EU,  this  would  stimulate  the  development  of  covered  bond  markets,  especially  in 
countries  where  currently  they  do  not  yet  exist  (see  option  2).  The  benchmark  in  terms  of 
additional  amount  of  covered  bond  issuance  is  expected  to  be  only  partially  achieved  if  no 
incentives are put in place as under sub-option 4.1 (25% of the benchmark). The main impact 
in terms of increased issuance would likely be felt on less developed markets. Increasing the 
share of covered bond issuance would help banks to lower the cost of their funding. However, 
the benchmark would only be partially achieved (25% of the benchmark). Under sub-option 
4.2, incentives in terms of more favourable preferential prudential treatment would be used to 
maximize  the  take  up  of  the  new  regime.  This  could  help  achieving  a  higher  share  of  the 
benchmark (50%) both in terms of issuance and related savings. However, this would come at 
high costs of disruption of the existing markets.  

Expanding  the  scope  of  covered  bond  markets  is  not  only  to  be  intended  from  the 
geographical  perspective,  but  also  in  terms  of  issuers'  characteristics.  The  new  regulation 
would introduce measures to allow the use of pooled covered bond structures and encourage 
the issuance by smaller banks.  

GO1 - Specific objective 2: investor base diversification in line with the benchmark of 60% 
would  not  be  achieved.  What  can  be  achieved  is  the  50%  of  the  baseline  due  to  the 
consequence of the tapering of the ECB purchasing programme. However, additional benefits 
deriving  from  a  unified  market  would  not  materialize  as  the  market  would  likely  remain 
fragmented  under  this  option.  Well-established  markets  are  indeed  expected  to  retain  their 
current  systems  and  those  would  co-exist  with  the  29th  regime,  especially  under  sub-option 
4.1.  Under  sub-option  4.2,  the  disruption  in  the  banking  sector  due  to  the  repealing  or 
reduction  of  the  preferential  prudential  treatment  could  favour  investor  diversification  away 
from  banks.  However,  it  would  come  at  high  costs  of  disruption  among  investing  banks. 
Some additional benefit can be expected compared to the baseline only under sub-option 4.2. 

GO1  -  Specific  objective  3:  introducing  a  29th  regime  would  not  address  the  problem  of 
market fragmentation. The benchmark benefit is not expected to be achieved. 

GO1  -  Specific  objective  4:  introducing  a  29th  regime  would  not  address  the  problem  of 
market fragmentation and this may not help attracting third country investments. Under sub-
option 4.2, the new regime could be expected to be successful in taking off and in becoming 
the  EU  standard  for  third  country  investors  at  least  in  the  long  term.  Whether  this  option 
would allow achieving the intended benefits depends crucially on the degree of adoption by 
industry  stakeholders  which  could  be  estimated  low  on  the  basis  of  the  public  consultation 
feedback. Overall, the benchmark benefit of 16.5% is not expected to be achieved. 

GO2 - Specific objective 1: under option 4 a regulation instead of a directive would define 
covered  bond  characteristics.  There  would  be  no  discretionary  space  for  Member  States  to 
interpret and implement norms to suit their specificities and this would better guarantee full 
coherence  between  covered  bonds  structural  characteristics  and  their  preferential  prudential 
treatment  at  EU  level.  However,  under  sub-option  4.1,  prudential  concerns  for  the  existing 
regimes  would  not  be  addressed.  Only  under  sub-option  4.2,  prudential  concerns  would  be 
addressed. However, this would be costly and would provoke market turmoil. Costs related to 
the potential loss of preferential treatment would arise (see option 1). All those costs are likely 

68 

 
to  offset  any potential benefit deriving from this sub-option. The benefits  of comprehensive 
harmonization under both sub-options would therefore not be achieved. 

GO2  -  Specific  objective  2:  eligibility  conditions  for  CRR  preferential  treatment  would  be 
strengthened  in  a  way  similar  to  options  2  and  3.  While  this  would  solve  the  issue  of  the 
adequacy of art 129 capital treatment under sub-option 4.1, under sub-option 4.2 the change to 
the  CRR  would  exclusively  concern  the  29th  regime.  This  would  significantly  diminish  its 
importance.  It  would  also  be  costly  and  disruptive  and  would  provoke  turmoil  in  existing 
markets. Costs related to the potential loss of preferential treatment would arise (see option 1). 
Benefits of strengthening the capital preferential treatment would therefore only partially be 
achieved under sub-option 4.2. 

GO2  -  Specific  objective  3:  rules  would  be  introduced  to  define  principles  that  must  be 
respected  in  order  for  a  soft  bullet/CPT  covered  bond  to  be  recognized  compliant  with  the 
European  definition  of  covered  bond  in  the  regulation.  This  would  guarantee  coherence 
between  the  new  features  and  the  preferential  treatment  granted  to  all  covered  bonds, 
including soft bullets and CPT. In addition, as the extendible maturity structures (soft bullets 
and CPT) affect the extent of liquidity risk, the regulation would define strict rules for how to 
manage the interaction between liquidity buffers and extendible structures instead of leaving 
this choice to Member States in order to keep risks under control. However, those rules will 
be  applicable  only  to  those  covered  bonds  issued  under  the  29th  regime.  Covered  bonds 
outside  the  29th  regime  would  stay  under  current  rules  and  maybe  follow  market  based 
standards  (see  baseline).  If  the latter  would  not  be  aligned with  the  EU  rules  under  the  29th 
regime, this could create confusion in the markets and could translate into higher costs both 
for issuers and for investors. Benefits would therefore only partially be achieved. 

Indirect benefits 

In terms of overall savings in funding costs for the real economy, the benchmark of between 
€1.5 bn and €1.9 is expected to be achieved only partially under this scenario (between 25% 
and 50% of the maximum benefit). 

While  in  terms  of  pro-cyclicality  a  similar  approach  would  be  followed  under  option  4  as 
under  options  2  and  3,  it  is  not  clear  the  relevance  this  might  have  in  financial  markets. 
Whether those effects matter at all would depend on the size of the market based on the 29th 
regime  which  on  its  turn  depends  on  the  degree  of  adoption  by  industry  stakeholders.  The 
latter could be estimated low on the basis of the public consultation feedback. 

5.5.2.  Costs 

Direct costs  

The introduction  of a 29th regime would increase complexity as issuers would have  to  cope 
with the administrative costs of dealing with an additional regime. These costs would be both 
one-off  (changing  legal  documentation,  amending  IT  systems,  requiring  additional  legal 
advice) and recurrent (increased audit and management fees, payment of a fee to a cover pool 
monitor, other supervisory and regulatory costs). In terms of one-off and transition costs, they 
would be similar to option 3. One-off direct costs for setting up a covered bond programme 
could  therefore  be  expected  to  move  towards  the  upper  bound  of  the  range  provided  in  the 
benchmark  of  €1.8  million.  Recurrent  costs  are  expected  to  fully  hit  the  benchmark  of 
between €300,000 and €475,000.  

69 

 
Under  sub-option  4.1, the  likely  fragmentation  of  the  market  into  several  regimes  including 
the  29th  would  likely  cause  duplication  of  costs  for  those  issuers  choosing  to  manage  more 
than  one  regime  at  the  same  time.  Under  sub-option  4.2,  it  is  more  likely  that  systems 
converge;  however  this  would  happen  only  in  the  long-term  and  at  high  costs  as  current 
regimes and well-established national markets would be disrupted. 

For labelling costs, similar considerations hold as for options 2 and 3. 

An increase in costs compared to the baseline would also be expected for investors, as in their 
due diligence processes instead of simplifying and saving costs, they would have to deal with 
an  additional  regime  implying  higher  complexity,  lower  transparency  and  higher  costs  (this 
especially holds under sub-option 4.1). 

Enforcement costs 

The introduction of a 29th regime would place a further burden on supervisors as they would 
have  to  deal with  an  additional regime. This  would be the case under sub-option 4.1, while 
under sub-option 4.2 the convergence to a single harmonised regime could take place in the 
long  term. In  both  cases, the transition would imply higher complexity and higher costs for 
supervisors  as  they  would  not  only  have  to  adapt  the  current  supervisory  system  to  the 
enhanced duties and powers that the new regulation would envisage similarly to what happens 
under option 3. They would also have to supervise an additional regime subject to a different 
set of rules. This could risk duplicating supervisory costs. In addition, a major effort in terms 
of  issuance  of  level  2  legislation  by  EU  bodies  would  be  needed  under  option  4  to  allow  a 
new detailed framework be fully up and running across the EU. Finally, under this option  a 
centralized  supervision  under  the  SSM  could  be  envisaged  for  the  largest  banks  issuing 
covered bonds in the euro area. The shift of supervision from national authorities to the SSM 
would  imply  adaptation  and  organizational  costs.  For  labelling  costs,  similar  considerations 
hold as for options 2 and 3. Overall, the benchmark for enforcement costs is expected to be 
fully hit. 

Indirect costs 

Introducing  or  amending  covered  bond  legislation  could  have  indirect  costs  for  unsecured 
creditors. This type of impact can be considered under two different angles: the legal and the 
economic  one.  Under  both  perspectives,  similar  considerations  hold  as  for  options  2  and  3. 
However,  it  is  not  clear  the  relevance  this  might  have  in  financial  markets.  Whether  those 
effects matter at all would depend on the size of the market based on the 29th regime which on 
its  turn  depends  on  the  degree  of  adoption  by  industry  stakeholders.  The  latter  could  be 
estimated low on the basis of the public consultation feedback. 

5.5.3.  Overall assessment 

Effectiveness, efficiency, coherence 

While a new covered bond regime along the lines of this option would constitute an integrated 
and  coherent  framework  for  covered  bond  markets  and  would  offer  a  comprehensive 
regulatory  framework  to  issuers  wanting  to  use  an  EU  label,  this  option  would  entail  either 
low effectiveness or high costs  depending on which sub-option is chosen. Under sub-option 
4.1,  a  limited  market  take-up  is  expected,  differentiated  according  to  whether  covered  bond 
markets are already in place (low) or not (high). Therefore its effectiveness in accomplishing 
stated  objectives  would  be  undermined.  Under  sub-option  4.2,  the  take  up  could  be 

70 

 
maximized;  however,  this  would  come  at  the  cost  of  disruption  of  the  existing  markets. 
Option  4  would  increase  fragmentation  and  related  costs  especially  under  sub-option  4.1, 
resulting  in  this  option  being  less  efficient.  Overall  the  option  would  not  guarantee  the 
achievement of the objectives of the review in an effective, efficient and coherent way. While 
for other EU initiatives a 29th regime could be considered the optimal solution, in this case the 
final  objective  is  the  convergence  to  a  single  harmonized  framework,  differently  than  for 
example  in  the  PEPP  initiative.  Ending  up  with  different  frameworks  or  converging  on  a 
single  one  only  in  the  long  term  and  at  high  costs  in  terms  of  disruption,  would  not  be  an 
effective and efficient way to achieve the specific objectives of this initiative and to match its 
level of policy ambition. 

Winners and losers 

On  the  basis  of  the  above,  table  9  summarises  the  benefits  and  costs  of  option  4  for  each 
category of stakeholders. Issuers would benefit from a lowering of funding costs and citizens 
would enjoy in their turn some lower borrowing costs as well. Investors would benefit from a 
stronger  regime  only  if  they  invest  in  covered  bonds  issued  under  the  29th  regime,  while 
supervisors would suffer from losing some of their competences in favour of the ECB and for 
having  to  monitor  different  regimes.  Costs  would  increase  for  issuers  and  supervisors  up  to 
the  maximum  extent  of  the  benchmark  as  the  regimes  under  their  management/supervision 
would likely be more than one. Under this option costs would also increase for investors due 
to complexity in the market following the introduction of a 29th parallel regime. Overall, costs 
would increase for citizens because of the increased fragmentation under sub-option 4.1 or for 
costs of disruption of the existing markets under sub-option 4.2. 

Table 9 – Impacts on different stakeholders of Option 4   

Issuers 

Investors 

Supervisors 

Citizens 

Benefits 

Costs 

↑ 

↑↑ 

Stakeholder views 

↑ 

↑ 

↓ 

↑↑ 

↑ 

↑ 

This  option  did  not  find  any  support  amongst  stakeholders.    Stakeholders  from  all  groups 
(supervisory authorities, Member States, the EBA, investors, issuers and the ECB) pointed to 
increased  market  fragmentation,  lower  transparency  and  more  uncertainty  as  a  result  of 
introducing  a  new  system  in  parallel  to  the  existing  national  systems.  Stakeholders  also 
noticed that in order to ensure a high take up incentives would need to be provided in terms of 
preferential  treatment  (sub-option  4.2).  However,  they  expressed  concerns  about  disrupting 
current markets under this sub-option. The EBA did not assess this option in their 2016 report. 
The  Parliament  did  not  consider  this  option  in  their  report  either.  Member  States  expressed 
their concern with this option in the course of expert groups meetings. 

6.  COMPARISON OF OPTIONS 

Table  10  summarises  the  extent  to  which  the  options  are  effective,  efficient  and  coherent. 
Effectiveness  is  mapped  against  the  specific  objectives  set  out  in  section  3.  The  respective 
scores are attributed on the basis of the analysis above.  

71 

 
 
 
Table 10 – Summary of options in terms of effectiveness, efficiency and coherence   

Efficiency 

Coherence 

Score 

Effectiveness 

Objective 1  
Enhance 
CMU 
potential 

Objective 2   
Coherence of 
prudential 
regulation with 
characteristics 
of the 
instrument 

Baseline  

Option 1 

Option 2 

Option 3 

0 

+ 

++ 

++ 

0 

≈ 

+ 

++ 

0 

++ 

++ 

- - 

0 

≈ 

+ 

++ 

0 

3 

6 

4 

++ 

Option 4 
Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive  (score  2);  +  positive  (score  1);  –  – 
strongly negative (score -2); – negative (score -1); ≈ marginal/neutral (score 0). 

-  

3 

+ 

+ 

Table  10  shows  that  option  1  is  not  effective  in  terms  of  meeting  the  objectives  whereas 
options 2, 3 and 4 do it to a varying extent. At the same time, the table shows that option 2 is 
expected  to  achieve  the  objectives  at  lesser  costs  compared  to  options  3  and  4.  As  regards 
coherence,  option  3  scores  the  best  but  options 2  and  4  are  also  judged  in  line  with  overall 
policy objectives. In sum, the option which promises the best possible balance across the three 
criteria of effectiveness, efficiency and coherence is option 2. 

Having established how the options score in terms of effectiveness, efficiency and coherence, 
table 11 also highlights how the options score in terms of the level of  stakeholder support 
and overall level of regulatory ambition. The latter could be an indication of the political 
challenges associated with the option in question. 

Table 11 – Summary of pros/cons of options  

Option 

Effectiveness/efficiency/coherence  Stakeholders support 

Level of ambition/challenge  

1 

2 

3 

4 

Medium (3) 

Medium 

High (6) 

High (4) 

Medium (3) 

High 

Low 

Low 

Low 

Medium 

High 

Medium 

Table  11  shows  that  options  2  and  3  present  the  best  combination  of  the  criteria  of 
effectiveness,  efficiency  and  coherence  underlined  by  their  high  scores.  At  the  same  time, 
stakeholders support is high for option 2, medium for option 1, while it is low for options 3 
and 4. Options 2, 3 and 4 are rated to be more ambitious.  

72 

 
 
 
 
 
 
 
 
6.1.1.  Retained option 

In  light  of  the  above,  the  retained  option  is  option  2:  minimum  harmonization  based  on 
national  regimes.  It  achieves  most  of  the  objectives  of  the  initiative  at  reasonable  costs.  It 
furthermore  appropriately  balances  the  degree  of  flexibility  necessary  to  accommodate 
Member States features with the uniformity that is necessary for achieving coherence at EU 
level. It is likely to be the most effective in achieving the objectives, while at the same time 
being  efficient,  minimising  disruption  and  transition  costs.  Of  the  options  considered,  it  is 
also, among the most ambitious options in regulatory terms, while, at the same time, being the 
course  of  action  that  enjoys  the  highest  support  by  stakeholders.  All  of  them:  institutional 
stakeholders,  supervisors,  Member  States  and  industry  support  this  option.  The  EBA,  the 
ECB, the Parliament, national and European supervisors have advocated for this option. This 
is the option that fits with the EBA Report and the EP Report. A majority of Member States is 
also favourable to this option. Among them, all the largest markets. The ECBC (representing 
almost all issuers in the market and investors) is also in favour of this option.   

3. 
Annex  6  describes  the  detailed  provisions  under  the  retained  option,  specifying  for 
each of them whether and how they deviate from the EBA 2016 Report and how they differ 
from  the  current  situation  in  Member  States  where  a  legal  covered  bond  framework  is  in 
place. The last column in the table in Annex 6 summarizes the potential impacts on Member 
States of the detailed provisions under the retained option.  

7.  OTHER SPECIFIC IMPACTS OF THE RETAINED POLICY OPTION 

7.1. 

Impacts on SMEs 

The  policy  option  chosen  would  have  some  direct  and  indirect  positive  effects  on  SME 
financing. Direct  benefits stem from the fact that  covered bonds sometimes directly finance 
commercial  and  residential  mortgages  which  are  often  related 
to  SME  activities. 
Entrepreneurs can  use  their  residential  property as  collateral for  financing their professional 
activity;  commercial  mortgages  finance  business  facilities  (offices,  productive  capacity  and 
shopping malls, etc.); public sector loans finance local infrastructure (like schools, hospitals 
etc.) and possibly guarantee SME loans.  

However, the most significant benefit on SMEs would come from the initiative on European 
Secured  Note  (ESN)  which,  as  explained  at  the  forefront  of  this  impact  assessment,  is  a 
parallel separate initiative.  

7.2. 

Social impacts 

The  main  social  impacts  of  the  retained  option  would  be  on  the  housing  and  real  estate 
markets.  As  shown  in  section  2.1.1,  covered  bonds  are  an  important  tool  for  financing 
mortgages.  Mortgages  (around  €7  trillion  in  2015)  represent  16%  of  total  assets  in  the  EU 
banking sector (€43.3 trillion) and 30% of the total loans provided by EU banks (€23.5 trillion 
in 2015). In terms of share of residential lending, covered bonds finance an average of 30% of 
residential mortgages lending in the EU in 2015 (see section 2.1.1.). Fostering covered bond 
markets  would  contribute  to  lower  interest  rates  on  mortgages  (see  benchmark  for  indirect 
benefits). 

73 

 
7.3.  Environmental impacts 

Covered bonds contribute to finance lending and hence increase demand for commercial and 
residential  real  estate.  This  contributes  to  increasing  the  supply  of  real  estate,  which  has  an 
effect  on  the  environment.  To  mitigate  environmental  concerns,  the  European  Mortgage 
Federation/ECBC has  launched  an “Energy Efficient  Mortgage  Initiative”  to support energy 
efficiency improvements in buildings. The aim of the initiative is to explore ways to mobilise 
private mortgage financing to boost energy efficient building renovation in Europe.  

In the EU, buildings are responsible for 40% of total energy consumption and 36% of CO2 
emissions. About 35% of the EU’s buildings are over 50 years old and 75-90% of the building 
stock  is  predicted  to  remain  standing  in  2050,  making  energy  efficient  renovation  a  top 
priority  for  Europe.  By  improving  the  energy  efficiency  of  buildings  alone,  the  EU’s  total 
energy consumption could be reduced by 5-6% and CO2 emissions by 5%. The scale of the 
investment needed is estimated at around €100 billion per year.  

European  mortgage  and  covered  bond  industries  could  play  a  role  in  the  financing  of  those 
investments  in  energy  efficiency.  The  idea  is  to  incentivise  homeowners  to  move  their 
properties out of the ‘brown’ zone (e.g. energy rating E-G) into the ‘green’ zone (e.g. energy 
rating A-D) by way of preferential interest rates or additional funds at the time of origination 
of the mortgage. Mortgages as an existing financial product are indeed familiar to consumers 
in  Europe,  and  are  offered  at  an important  moment  in  the  building  lifecycle in  terms  of  the 
opportunity  to  renovate  real  estate.  An  appropriate  mortgage  instrument  could  therefore 
contribute to increasing the current rate of energy efficient building renovation. The initiative 
is  only  recently  developing,  but  it  could  become  material  over  the  medium  term  with 
significant environmental impacts in terms of energy efficiency.  

EU action by means of minimum harmonisation of covered bonds could lend support to those 
efforts by further developing covered bond markets. 

8.  MONITORING AND EVALUATION 

No  sooner  than  five  years  after  the  date  of  transposition  of  the  Directive,  the  Commission 
shall  carry  out  an  evaluation  of  this  legislative  package  (consisting  of  a  regulation  and  of  a 
directive) and present a Report on the main findings to the European Parliament, the Council 
and  the  European  Economic  and  Social  Committee.  The  evaluation  shall  be  conducted 
according to the Commission's better regulation Guidelines. 
Member  States  shall  provide  the  Commission  with  the  information  necessary  for  the 
preparation of that Report. 

Member States shall regularly monitor the application of this legislative package based on the 
following non-exhaustive list of indicators, which correspond to the benchmark benefits and 
costs as defined in section 5.1 and exemplified in table 12. 

Table 12 – Benchmark benefits/costs and related monitoring indicators 

Objective 
General Objective 1 
Enhance CMU potential  

Benchmark benefits 

Monitoring indicators 

Specific  objective  1:  develop 
covered  bond  markets  in  all  EU 
countries 

a) Number of countries adopting a 

framework 
b) Additional issuance 

1) Number of MS adopting a CB 

framework 

2) Yearly issuance of CBs in MS 
3) Funding sources of European 

74 

 
 
 
 
Specific  objective  2:  diversify 
investor base  

c) Savings of funding costs for banks 
d) Overall savings in borrowing for 

the real economy 

e)  Diversification  of  the  investor 
base 

banks and related costs 

4) Investors by type 

Specific  objective  3:  tap  potential 
for more cross border investments  

Percentage 

f) 
investments 

of 

cross-border 

5)  Percentage  of  cross-border 

objective 
Specific 
investors from outside the EU  

4: 

attract 

g) Percentage of covered bonds held 
outside the EU 

investments 

6) Investors by geography 
7)  Percentage  of  covered  bonds 

8) 

held outside the EU 
Inward-outward 
from/to third countries 

investments 

General Objective 2 
Coherence 
regulation  

of  EU  prudential 

Specific  objective  1:  align  the 
structural characteristics of covered 
bonds across the EU  

Specific  objective  2:  strengthen 
the 
capital 
preferential  treatment in CRR  

requirements 

for 

Specific  objective  3:  define  a 
framework for soft bullets/CPTs 

No measurable benefit 

9)  CB  enjoying  LCR  preferential 

treatment 

10)  CB  enjoying  Solvency 

II 

preferential treatment 

11) Treatment of covered bonds in 

case of resolution 

12) Covered bonds in defaults 
13) Issuance of 129 CRR compliant 

covered bonds 

No measurable benefit 

No measurable benefit 

14)  Share  of  soft  bullet/CPT 

Benchmark costs 

Direct administrative costs 

issuance 

15)  Extensions  of  maturities  for 

soft bullets/CPT 

Monitoring indicators 

16) Licensing fees 
17) Cover pool monitor costs 
18) Supervisory and regulatory fees 
19) Grandfathering 

Enforcement costs 

20) Supervisory costs 

Indirect costs 

21) Level of asset encumbrance 

Member States shall organise the production and gathering of the data necessary to measure 
the change in the indicators described in table 12 above, and shall supply that information to 
the Commission on a yearly basis. 

In particular, concerning the first indicator, the Commission will be in charge of monitoring 
the implementation of the directive according to EU law. Indicators 2, 4, 5, 6, 7 and 8 are to 
be collected through the help of market associations such as the ECBC. Indicators from 9 to 
15 and indicator 20 require the involvement of  supervisors. Surveys among Member States' 
competent  authorities  will  be  used  for  this  purpose.  Indicators  from  16  to  19  are  to  be 
provided  both  by  supervisors  and  market  associations.  Surveys  among  Member  States' 
competent  authorities  will  be  used  for  this  purpose.  However,  indicator  17  will  need  the 
involvement of the industry, depending on the model of cover pool monitor adopted. Finally, 
concerning  indicators  3  and  21,  they  are  currently  monitored  by  the  EBA  which  reports 
periodically on them. 

75 

 
 
 
 
 
 
 
 
 
 
 
 
REFERENCES 

Banerjee  A.,  V.  Bystrov  and  P.  D.  Mizen  (2013),  “How  Do  Anticipated  Changes  to  Short-
Term  Market  Rates  Influence  Banks'  Retail  Interest  Rates?  Evidence  from  the  Four  Major 
Euro Area Economies”, in Journal of Money, Credit and Banking, Vol. 45, 1375-1414. 

Birchler  U.W.  (2000),  "Bankruptcy  Priority  for  Bank  Deposits:  A  Contract  Theoretic 
Explanation", in Review of Financial Studies, Vol. 13, Issue 3, pp. 813–840. 

Borio C., and W. Fritz (1995), “The Response of Short-Term Bank Lending Rates to Policy 
Rates: a Cross Country Perspective.” BIS Working Paper No. 27. 

Chemla G. and C. Hennesy (2014), "Skin in the Game and Moral Hazard", in The journal of 
Finance, Vol. 69, Issue 4, pp. 1597–1641. 

Darracq-Paries M., Moccero N., Krylova E. and C.Marchini (2014), "The retail bank interest 
rate pass through: the case of the Euro Area during the financial and sovereign debt crisis", 
ECB Occasional Paper Series 155, September. 

De Bondt G. (2002), "Retail bank pass through: new evidence at the Euro Area level”, ECB 
Working Paper 136. 

De Graeve F., O. De Jonghe and R.V. Vennet (2007), “Competition, Transmission and Bank 
Pricing Policies: Evidence From Belgian Loan and Deposit Markets”, in Journal of Banking 
and Finance, Vol 31, pp. 259-278. 

Deutsche Bundesbank (2016), "Asset encumbrance, bank funding and financial fragility", 

https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Discussion_Paper_1/
2016/2016_06_13_dkp_17.pdf?__blob=publicationFile 

EBA (2017a), "Report on asset encumbrance",  

https://www.eba.europa.eu/documents/10180/1720738/EBA+Report+on+Asset+Encumbr
ance+-+July+2017.pdf  

EBA (2017b) "Report on Funding plans", 

https://www.eba.europa.eu/documents/10180/1720738/Report+on+Funding+Plans+-
+July+2017.pdf ) 

EBA  (2016),  "Report  on  covered  bonds  -  Recommendations  on  Harmonisation  of  Covered 
Bond Frameworks in the EU", EBA-Op-2016-23, 20 December 2016: 

https://www.eba.europa.eu/documents/10180/1699643/EBA+Report+on+Covered+Bonds
+%28EBA-Op-2016-23%29.pdf 

EBA (2014), "Report on EU covered bond frameworks and capital treatment", July 2014:  

https://www.eba.europa.eu/-/eba-supports-capital-treatment-of-covered-bonds-but-calls-
for-additional-eligibility-criteria 

EBRD  (2017),  "Pan  Baltic  Covered  Bond  Structure  -  First  Draft  of  the  Proposal",  11 

September 2017. 

76 

 
 
 
 
 
ECBC (2013), "Position Paper on asset encumbrance", June 2013 

EMF and ECBC (2017), "Market Insights & Updates", February 2017. 

ESRB  (2012),  "Recommendation  on  funding  of  credit  institutions"  (ESRB/2012/2,  Rec.  E), 

December 2012: 
https://www.esrb.europa.eu/pub/pdf/recommendations/2012/ESRB_2012_2.en.pdf?8de39
22e86b0f4863bc6e748f1f1a4c0 

European  Commission  (2017a).  Communication  on  the  Mid-term  Review  of  the  Capital 
Markets Union (CMU) Action Plan, COM (2017) 292 final, 08.06.2017.  

European  Commission  (2017b).  "State  of  the  Union  2017:  Letter  of  Intent  to  President 
Antonio Tajani and to Prime Minister Juri Ratas":  

https://ec.europa.eu/commission/sites/beta-political/files/letter-of-intent-2017_en.pdf    

European  Parliament  (2017),  Bernd  Lucke  (A8-0235/2017)  "Towards  a  pan-European 
covered bonds framework", approved 4th July 2017. 

Gambacorta L. (2008), “How Do Banks Set Interest Rates?” in European Economic Review, 
Vol. 52, pp. 792-819. 

Hofmann  B.  and  P.D.  Mizen  (2004),  “Interest  Rate  Pass  Through  in  the  Monetary 
Transmission  Mechanism:  Evidence  from  Individual  Financial  Institutions  Retail  Rates”,  in 
Economica, Vol 71, pp. 99-125. 

ICF (2017), "Covered Bonds in the European Union: harmonisation of legal frameworks and 
market behaviours", Study for the European Commission, May 2017. 

Illes A., Lombardi M. and P. Mizen (2015), "Why did bank lending rates diverge from policy 
rates after the financial crisis?", BIS Working Papers No 486, February. 

IMF,  (2013),  “Changes  in  bank  funding  patterns  and  financial  stability  risks”,  Global 
Financial Stability Report, Ch 3, October 2013. 

Kwapil  C.  and  J.  Scharler  (2010),  “Interest  Rate  Pass-Through,  Monetary  Policy  Rules  and 
Macroeconomic Stability”, Journal of International Money and Finance, Vol 29, pp. 236-51. 

Van  Rixtel  A.  and  G.  Gasperini  (2013),  “Financial  crises  and  bank  funding:  Recent 
experience in the euro area”, BIS Working Paper 406. 

77 

 
 
 
 
ANNEX 1 - PROCEDURAL INFORMATION 

I. Lead dg, decide planning / cwp references 

This  Impact  Assessment  Report  was  prepared  by  Directorate  D  "Regulation  and  prudential 
supervision  of  financial  institutions"  of  the  Directorate  General  "Directorate-General  for 
Financial Stability, Financial Services and Capital Markets Union" (DG FISMA). 

The Decide Planning reference of the "Initiative on the integrated covered bond framework" 
is PLAN/2015/030. 

The initiative on the harmonisation of the covered bond market was included in the Mid-Term 
Review of the Capital Markets Union Action Plan from 08.06.2017. 

II. Organisation and timing 

Several services of the Commission with an interest in the assessment of the initiative have 
been associated in the development of this analysis. 

Three  Inter-Service  Steering  Group  (ISSG)  meetings,  consisting  of  representatives  from 
various Directorates-General of the Commission, were held in 2017. 

The  first  meeting  took  place  on  14  June  2017,  attended  by  DG  ECFIN,  COMP,  GROW, 
JUST, TRADE and the Secretariat General (SG).  

The second meeting was held on 18 July 2017. The representatives from DG ECFIN, JUST, 
GROW and the Secretariat General (SG) were present.  

The third meeting was held on 28 September 2017 and was attended by DG GROW and SG. 
This was the last meeting of the ISSG before the submission to the Regulatory Scrutiny Board 
on 6 October 2017.  

The meetings were chaired by SG.  

DG FISMA has updated the Impact Assessment Report by taking into account the comments 
made by SG, ECFIN, JUST and GROW. In particular, the following changes were made: 

  The  labelling  system  of  the  covered  bonds  was  clarified,  taking  into  account  the 
discussions  on  the  securitisation  proposal,  in  particular  the  options  of  standalone 
labelling, third party verification or public confirmation. 

  The absence of changes to the Solvency II framework was explained. 

  The end of the ECB purchasing programme, and its consequences, were removed from 

the problem definition but left rather as an element of the context. 

  CMU dimensions in the problem definition were broadened and clarified 

  As  regards  the  options  further  explanations  on  the  eligibility  of  the  assets  under  the 

option to develop a principle-based legislation have been included. 

  The link of the initiative with the European Secured Notes has been clarified; 

  Specific comments provided by DG ECFIN have been integrated in the document; 

78 

 
  The  new  updated  models  of  the  Annexes  provided  in  the  revised  toolbox 
https://myintracomm.ec.europa.eu/sg/better_regulation/Documents/tool_42.pdf  have 
been used. 

III. Exceptions to the better regulation guidelines 

No exception from the Better Regulation Guidelines has been identified by DG FISMA.  

IV. Consultation of the regulatory scrutiny board (rsb) 

The  Impact  Assessment  report  was  examined  by  the  Regulatory  Scrutiny  Board  on  XX 
XXXX, 2017. The Board gave a XXXX opinion and … 

V. Evidence, sources and quality 

The  impact  assessment  has  been  carried  out  with  the  comprehensive  qualitative  and 
quantitative  evidence  from  various  recognised  sources,  including  the  two  reports  by  the 
European Banking Authority (EBA) and by taking account the findings of the commissioned 
study  to  an  external  consultant.  The  source  of  the  analysis  also  included  a  targeted  public 
consultation with stakeholders.  

The  European  Parliament's  Own  Initiative  Report  "Towards  a  pan-European  covered  bonds 
framework" has also been taken into account. 

In  terms  of  milestones,  in  a  response  to  the  ESRB  recommendation  from  2012  on  the 
preferential  capital  treatment  of  covered  bonds,  the  EBA  issued  a  ‘Report  on  EU  covered 
bond frameworks and capital treatment' in 1 July 2014, identifying best practices with a view 
to  ensuring  robust  and  consistent  frameworks  for  covered  bonds  across  the  EU.  The  report 
was  made  in  close  cooperation  with  the  national  competent  authorities  in  the  Subgroup  on 
Securitisation  &  Covered  Bonds.  As  a  follow-up  to  the  identification  of  best  practices,  the 
ESRB recommended to the EBA to monitor the functioning of the market for covered bonds 
by reference to these best practices for a period of 2 years.  

On 20 December 2016 the EBA delivered "Report on covered bonds - Recommendations on 
harmonisation of covered bond frameworks in the EU" to the ESRB and to the Council and 
the Commission containing an assessment of the functioning of the market for covered bonds 
under  the  best  practice  principles.  This  report  was  also  made  in  the  Subgroup  on 
Securitisation and Covered Bonds.  

The  report  concluded  that  due  to  the  confirmed  existing  diversity  in  national  covered  bond 
frameworks,  significant  market  and  regulatory  developments  with  direct  impact  on  covered 
bonds,  and  the  overall  importance  of  covered  bonds  for  the  funding  of  the  EU  economy, 
further harmonisation would be necessary in ensuring more consistency in terms of definition 
and  regulatory  treatment  of  covered  bonds  in  the  European  Union.  The  report  further 
concluded that harmonisation should build on the well-functioning markets already existing in 
some Member States.  

The  EBA  report  announced  its  proposal  for  a  three-step  approach  to  the  harmonisation  of 
covered  bond  frameworks  in  the  EU  focussing  on:  (i)  the  development  of  a  covered  bond 
framework with the introduction of a new covered bond directive (Step 1); (ii) amendments to 
the Capital Requirements Regulation (CRR) relating to the preferential risk-weight treatment 
(Step 2); and (iii) voluntary convergence (Step 3).  

79 

 
These three steps to harmonisation were proposed after the European Commission concluded 
the  analysis  of  the  responses  received  to  the  public  consultation  that  was  published  in 
September  2015  and  was  aimed  to  assess  the  convenience  of  a  possible  future  integrated 
European covered bond framework that could help improve funding conditions throughout the 
Union and facilitate cross-border investment and issuance in Member States. 

In  August  2016  the  European  Commission  commissioned  a  detailed  study  to  an  external 
consultant  ICF  on  this  proposal,  assessing  the  potential  costs  and  benefits  of  moving  ahead 
with a legislative framework for the covered bonds. The Report was based on the following 
sources:  

  A  review  and  synthesis  of  relevant  reports  produced  by  the  European  Banking 
Authority  (EBA),  the  European  Central  Bank  (ECB),  the  European  Covered  Bonds 
Council (ECBC) and relevant academic and grey material.  

  Quantitative  and  qualitative  analysis  of  the  responses  received  to  the  public 

consultation.  

information  from  rating  agencies, 

  Analysis  of  descriptive  statistics  compiled  from  a  variety  of  sources  including, 
investment  banks, 
published 
unpublished analysis from rating agencies, issuers, issuer associations, and investment 
banks, the ECBC 2016 Factbook, the ECBC comparative database, the covered bond 
label website, the covered bond investor council website, and primary and secondary 
laws in Member State.  

issuers  and 

  Stakeholder  interviews  covering  issuers,  investors,  supervisors/regulators,  industry 

bodies and rating agencies.  

  An online survey of issuers and national coordinators that received 61 responses.  

The report ‘Covered Bonds in the European Union:  Harmonisation of legal frameworks and 
market behaviours’ was published in May 2017. 

The quality of the studies can be considered high as they represent the currently best available 
information  on  the  covered  bonds  markets  developments  and  include  quantitative  and 
qualitative input from all the identified stakeholders.  

80 

 
 
 
 
ANNEX 2 – SYNOPIS REPORT ON STAKEHOLDER CONSULTATIONS   

I. Overview of consultation activities 

1.  ESRB Recommendation on the funding of credit institutions in December 2012; 
2.  First EBA Report on EU Covered Bonds in July 2014; 
3.  The Commission's open Public Consultation which ran between 30 September 2015 
and 06 January 2016, followed by a conference in February 2016 organized by DG 
FISMA;  

4.  Public hearing held by the EBA in November 2016 before publishing the EBA report 
"Report on covered bonds - Recommendations on harmonisation of covered bond 
frameworks in the EU" in December 2016; 

5.  Publication of the ICF study ‘Covered Bonds in the European Union: Harmonisation 
of legal frameworks and market behaviours’ based on stakeholder interviews and an 
online survey, in May 2017;  

6.  Inception Impact Assessment on Covered Bonds published in June 2017; 
7.  In July 2017 the European Parliament approves its own-initiative Report on covered 

bonds; 

8.  Further stakeholder consultations, including meeting with Expert Group on Banking, 

Payments and Insurance in June and September 2017. 

II. Stakeholder consultations 

The  Commission  held  an  open  Public  Consultation  to  assess  the  convenience  of  a  possible 
future  integrated  European  covered  bond  framework.  The  Consultation  Paper  was  meant  to 
trigger a debate with stakeholders on the feasibility and potential merits of greater integration 
between covered bond laws.  

The consultation objective was to examine what weaknesses and vulnerabilities covered bond 
markets exhibited during the financial crisis and, against that backdrop, open a debate with all 
interested parties on the merits of targeted actions that could be taken to help improve funding 
conditions  on  the  back  of  these  instruments.  This  would  be  especially  important  where 
issuance  faces  legal  or  practical  difficulties  and  where  there  are  obstacles  to  cross-border 
investment  flows  within  the  Union  and  from  third  countries.  The  consultation  is  part  of  the 
Capital Markets Union project.  

The  consultation  was  open  to  the  public,  but  mainly  received  responses  from  the  key 
stakeholder groups concerned with covered bonds:  

  Covered bond issuers are credit institutions issuing covered bonds, either as their main 
business  activity  or  as  part  of  their  general  credit  institution  business.  It  should  be 
noted that covered bonds issuers are often also covered bond investors as the issuers 
are credit institutions subject to requirements of liquidity coverage and capital. 

  Covered  bond  investors  are  often  institutional  investors,  dominated  by  banks  and 
central banks, but asset managers, insurance companies and pension funds also play a 
significant  role.  Retail  investors  are  represented  indirectly  by  providing  funds  to 
pension funds and asset managers that then invest in covered bonds on their behalf. 

81 

 
 
  As  the  special  public  supervision  is  considered  to  be  one  of  the  main  structural 
features of covered bonds, the national competent authorities supervising the covered 
bond  issuers  are  important  stakeholders.  Since  there  are  large  differences  in  the 
national  covered  bond  frameworks,  harmonisation  could  imply  quite  extensive 
regulatory work in some Member States, meaning that the national governments also 
have strong views in the harmonisation discussion.  

  As covered bonds are all subject to external rating, the input from the rating agencies 
on  their  assessment  of  the  different  programmes  and  issuances  is  very  relevant  for 
further work on harmonisation. This especially regards transparency of the cover pool, 
liquidity  risk  mitigation  and  minimum  overcollateralisation  as  these  elements  are 
considered  important  structural  features  of  covered  bonds  and  are  regularly  assessed 
by the rating agencies.   

1. European Systemic Risk Board (ESRB) recommendation on funding of credit institutions- 
2012 

The  ESRB  recommendation  on  funding  of  credit  institutions  of  20  December  2012106 
recommended  national  supervisory  authorities  to  incentivise  the  implementation  of  best 
practices regarding covered bonds, and the EBA to coordinate such initiatives and to identify 
best practices as well as to consider the functioning of the marketplace in accordance with the 
principles identified. The recommendation also called for the EBA to consider if appropriate 
to refer the matter to the European Commission for potential further action.  

2. European Banking Authority (EBA) "Report on EU covered bond frameworks and capital 
treatment" 1st July 2014 

Article 503(1) of Regulation (EU) No 575/2013 provides that the EBA shall be consulted by 
the Commission on whether  the risk weights laid down in Article 129 of that Regulation are 
adequate  for  all  the  instruments  that  qualify  for  these  treatments,  whether  the  criteria  in 
Article 129 of that Regulation are appropriate and whether loans secured by aircrafts (aircraft 
liens) and residential loans secured by a guarantee but not secured by a registered mortgage, 
should under certain conditions be considered an eligible asset. The Commission issued a call 
for  advice  accordingly  and  the  EBA  issued  opinion  on  the  preferential  capital  treatment  of 
covered  bonds  recommending  a  further  convergence  of  national  legal/regulatory  and 
supervisory  covered  bond  frameworks,  so  as  to  further  support  the  existence  of  a  single 
preferential risk weight treatment to covered bonds in the EU. 

In a response to the ESRB recommendation and the Call for advice from the Commission, the 
EBA  issued  a  ‘Report  on  EU  covered  bond  frameworks  and  capital  treatment'  on  1st  July 
2014107, identifying best practices. The report included the opinion of the European Banking 

106 ESRB recommendation on funding of credit institutions (ESRB/2012/2, Recommendation E), December 2012 

(ESRB/2012/2): 

https://www.esrb.europa.eu/pub/pdf/recommendations/2012/ESRB_2012_2.en.pdf?8de3922e86b0f4863bc6e748

f1f1a4c0  

107 EBA report on EU covered bond frameworks and capital treatment, July 2014:  

https://www.eba.europa.eu/-/eba-supports-capital-treatment-of-covered-bonds-but-calls-for-additional-

eligibility-criteria  

82 

 
                                                 
Authority on the preferential capital treatment of covered bonds, also issued in response to the 
ESRB recommendation and the consultation of the EBA envisaged in Article 503 of the CRR. 

The  report  provided  a  first  comprehensive  overview,  from  the  regulatory  and  supervisory 
perspective, of the EU (including Iceland and Norway) national covered bond frameworks. It 
identified a series of best practice recommendations to cover areas not reflected in common 
EU legislation with a view to ensuring robust and consistent frameworks for covered bonds 
across the EU. 

3. Public consultation on 'Covered Bonds' 

On 30 September 2015, the European Commission launched an open public consultation on 
Covered Bonds in the European Union. The consultation closed on 6 January 2016. 

The purpose of the consultation, which is part of the Capital Markets Union Action Plan, was 
to evaluate weaknesses and vulnerabilities in national covered bond markets as a result of the 
crisis  and  to  assess  the  convenience  of  a  possible  future  integrated  European  covered  bond 
framework  that  could  help  improve  funding  conditions  throughout  the  Union  and  facilitate 
cross-border  investment  and  issuance  in  Member  States  currently  facing  practical  or  legal 
challenges in the development of their covered bond markets.  

All  citizens  and  organisations  were  encouraged 
the  consultation. 
Contributions  were  particularly  sought  from  participants  in  covered  bond  markets,  the  most 
relevant being investors, issuers and public authorities, but also rating agencies, organisations 
and other market participants. The list of the main stakeholders targeted in the consultation is 
provided at the beginning of Section II. 

to  contribute 

to 

The consultation paper was structured in three parts: 

1. Part I - Covered bond markets: economic analysis; 

2. Part II - Exploring the case for a more integrated framework; 

3. Part III - Elements for an integrated covered bond framework. 

The  Commission  received  76  responses.  19  responses  came  from  the  public  sector  and  57 
responses  came  from  the  private  sector.  The  private  sector  responses  divided  into  27  from 
issuers, 11 from investors and the remaining 19 from other private sector stakeholders, such 
as cross-industry and consumer associations, rating agencies, surveyors, service providers and 
individuals.   

Geographic breakdown of responses: 

Cross-Europe  
Austria  
Belgium108 
Czech Republic  
Denmark  

2  
3  
13  
3  
3  

108 Includes a number of Cross-Europe respondents based in Brussels   

83 

 
 
                                                 
Finland  
France  
Germany  
Ireland  
Italy  
Luxembourg  
Norway  
Poland  
Slovakia  
Spain  
NA 

1  
5  
9  
1  
3  
2  
1  
4  
1  
4  
21 

Overall,  stakeholders  agreed  that  covered  bond  markets  showed  increased  yield  divergence 
between  Member  States  since  2007.  Although  stakeholders  agreed  that  a  robust  legal 
framework would help to  reduce volatility  and ease market access  in times  of distress,  they 
did not generally regard an absence of EU-level harmonisation as the most significant factor 
causing market fragmentation. Furthermore, even robust legal frameworks cannot fully isolate 
the covered bond programme from issuer's specific risks, making stakeholders also suggesting 
disclosure requirements to be substantially increased.  

While  respondents  were  concerned  that  harmonisation  based  on  a  one-size-fits-all  approach 
could risk impairing well-functioning markets and reducing flexibility and product offering, at 
the  same  time,  they  showed  cautious  support  for  EU  targeted  action,  provided  that 
harmonisation  is  principles  based,  build  on  existing  frameworks  and  respect  the  unique 
characteristics of national frameworks. 

The  public  consultation  introduced  also  a  comprehensive  EU  law  framework  for  covered 
bonds, a so-called 29th regime as a substitute for harmonisation. The rationale behind the 29th 
regime was to make a framework available for issuers to resort to as an alternative to national 
laws. This proposal did not find any support amongst stakeholders, all of them pointing to the 
increased  market  fragmentation,  lower  transparency  and  more  uncertainty  as  a  result  of 
introducing  a  new  system  to  complement  the  existing  national  systems.  Stakeholders  also 
expressed  concerns  about  the  possibility  for  issuances  under  the  29th  regime  to  have  a 
sufficient  volume  without  introducing  more  favourable  preferential  treatment  for  issuances 
under the 29th regime than the existing regimes, thus disrupting the current market.  

In relation to market-led initiatives, respondents regard them as valuable but insufficient. For 
instance, while stakeholders consider the European "Covered Bond Label" as a positive step 
towards  better  integration  of  the  covered  bond  markets,  most  acknowledge  that  there  are 
certain  limitations  to  self-regulation:  voluntary  arrangements  cannot  form  the  basis  for  a 
specific regulatory treatment so they need to be complemented by sound regulatory treatment, 
at national or European level. Public authorities in particular noted that a significant weakness 
of voluntary standards is that it would be up to issuers to comply with them in times of crises. 

The  summary  of  the  replies  on  the  Open  Public  Consultation  has  been  published  here 
http://ec.europa.eu/finance/consultations/2015/covered-bonds/index_en.htm  

3.1. European Commission Conference on Covered Bonds  

84 

 
 
The European Commission conference on covered bonds was organized by DG FISMA on 1st 
February 2016. It included four sessions of panel debates with a short presentation from each 
of the 15 panellists. The panellists consisted of issuers, investors, supervisors, rating agencies, 
European  Covered  Bond  Council  (ECBC)  -  a  market  participant  organisation,  and  capital 
market professionals.  

Every one of the panellists but the ECB was quite cautious about harmonisation, referring to 
the resilience of covered bonds during the financial crisis, and requesting the Commission not 
to  mend  something  not  broken.  The  discussion  at  the  conference  seemed  more  doubtful 
regarding harmonisation than the responses in the public consultation. This may be due to the 
fact that the national competent authorities and governments were not represented among the 
panellists which were mainly from the industry.  

Some  panellists  mentioned  the  29th  regime  in  their  presentation,  repeating  the  concerns 
expressed by most stakeholders in the public consultation.  

4.    EBA  "Report  on  covered  bonds  -  Recommendations  on  harmonisation  of  covered  bond 
frameworks in the EU" - 20 December 2016 

As a follow-up to the identification of best practices, the ESRB recommended to the EBA to 
monitor the functioning of the market for covered bonds by reference to these best practices 
for a period of 2 years. On 20 December 2016 the EBA delivered a "Report on covered bonds 
- Recommendations on harmonisation of covered bond frameworks in the EU"109 to the ESRB 
and  to  the  Council  and  the  Commission  containing  an  assessment  of  the  functioning  of  the 
market for covered bonds under the best practice principles. 

In  its  Report  on  covered  bonds  the  EBA  proposes  a  three-step  approach  towards 
harmonisation of covered bonds, taking into account that EU covered bond frameworks differ 
in particular in regard to legal, regulatory, and supervisory issues, while acknowledging that 
the final framework should build on the strengths of existing national frameworks. This would 
still leave room for varying national implementation. 

Overall, the EBA proposes a three-step approach to harmonisation: 

  Step  1  focusses  on  the  structural  aspects  of  a  covered  bond:  Introduction  of  a 
harmonised  definition  of  covered  bonds,  replacing  Article  52(4)  of  the  UCITS 
Directive with a dedicated directive to become the single point of reference of covered 
bonds for regulatory purposes; 

  Step 2 addresses issues related to the preferential capital treatment of covered bonds. 
This  would  involve  targeted  amendments  to  Article  129  of  the  Capital  Requirement 
Regulation; 

  Step 3 includes voluntary measures at a national level. 

Drawing  on  the  EBA  recommendations,  a  potential  EU  legislative  framework  for  covered 
bonds could comprise step 1 and 2. 

4.1. EBA Public Hearing on the report on covered bonds 

EBA 

109 
https://www.eba.europa.eu/documents/10180/1699643/EBA+Report+on+Covered+Bonds+%28EBA-Op-2016-
23%29.pdf   

December 

covered 

bonds, 

report 

on 

20 

2016: 

85 

 
                                                 
The EBA held a public hearing in November 2016 before publishing the "Report on covered 
bonds  -  Recommendations  on  harmonisation  of  covered  bond  frameworks  in  the  EU".  The 
hearing was based on a presentation of the report which had not yet been published at the time 
of the hearing.  

The  discussion  at  the  hearing  mainly  concerned  the  more  technical  aspects  of  a  future 
harmonisation, especially including the introduction of more costly requirements on liquidity 
and overcollateralisation, and the use of non-traditional amortisation structures. 

The report was not changed materially after the public hearing.  

5. Feedback on the Inception Impact Assessment on Covered Bonds 

The  inception  impact  assessment  on  covered  bonds  was  published  on  9  June  2017  with  a 
possibility to provide feedback until 7 July 2017. 

The  Commission  received  four  responses  to  the  inception  impact  assessment.  All  of  them 
supported the EU legislative initiative. The low number of respondents is most likely due to 
the  very  thorough  public  consultation  ended  in  January  2016  followed  by  a  well-attended 
conference 1st February 2016 and ongoing consultations with stakeholders since then, both at 
bilateral  level  and  in  the  context  of  the  Expert  Group  on  Banking,  Pension  and  Insurance 
meeting on 9 June 2017. 

The responses for the inception impact assessment came from Intesa Sanpaolo (Italy), Finance 
Denmark  (The  Danish  organisation  of  issuers  of  covered  bonds),  the  French  Banking 
Federation  and  the  Austrian  Federal  Economic  Chamber  (the  legal  representation  of  the 
Austrian Banking Industry). 

The responses related to specific issues of the national frameworks, the relation with specific 
requirements  e.g.  on  liquidity,  and  repeated  the  general  view  of  not  jeopardising  the  well-
functioning national systems, while still supporting harmonisation as such. 

6. ICF study ‘Covered Bonds in the European Union: Harmonisation of legal frameworks and 
market behaviours’ 

European Commission requested in August 2016 a study from a third party contractor ICF on 
the  potential  impact  on  the  covered  bonds  on  the  market110.  The  study  assesses  the  current 
market  performance  and  the  costs  and  benefits  of  potential  EU  action.  On  the  basis  of  a 
literature review; qualitative and quantitative analysis and stakeholder interviews, for a total 
of 106 organizations consulted in the period between November 2016 and February 2017, the 
study concluded there was a case for legislative action.  

The study was based on:  

  A  review  and  synthesis  of  relevant  reports  produced  by  the  European  Banking 
Authority  (EBA),  the  European  Central  Bank  (ECB),  the  European  Covered  Bonds 
Council (ECBC) and relevant academic and grey material.  

110  ICF  (2017),  "Covered  Bonds  in  the  European  Union:  Harmonisation  of  legal  frameworks  and  market 

behaviours". Study for the European Commission (May 2017). 

86 

 
 
 
                                                 
  Quantitative  and  qualitative  analysis  of  the  responses  received  to  the  public 

consultation. 

information  from  rating  agencies, 

  Analysis  of  descriptive  statistics  compiled  from  a  variety  of  sources  including, 
investment  banks, 
published 
unpublished analysis from rating agencies, issuers, issuer associations, and investment 
banks, the ECBC 2016 Factbook, the ECBC comparative database, the covered bond 
label website, the covered bond investor council website, and primary and secondary 
laws in Member State.  

issuers  and 

  Stakeholder  interviews  covering  issuers,  investors,  supervisors/regulators,  industry 

bodies and rating agencies.  

  An online survey of issuers and national coordinators that received 61 responses. 

The  study  determined  that  overall  the  potential  benefits  of  a  legislative  framework 
outweighed  any  potential  costs.  The  study  took  into  account  the  EBA  report  findings.  It 
recommended following the EBA report recommendations in step 1 and step 2. 

7. European Parliament own-initiative report on covered bonds approved on 4 July 2017  

European Parliament voted its own-initiative report on covered bonds on 4 July 2017111. The 
key points of the EU Parliament Report are that they favour legislation provided the approach 
is cautious. The EP stressed that the covered bond market has functioned well, while saying 
that  diversity  among  covered  bonds  need  to  be  maintained.  It  noted  that  an  integrated 
framework  needs  to  be  principle-based,  build  on  high-quality  standards  and  aligning  best 
practices 

The EU Parliament prefers that the new covered bond Directive should  distinguish between 
‘premium  covered  bonds’,  which  do  adhere  to  the  Article  129  of  the  CRR,  and  ‘ordinary 
covered bonds’, which would meet structural requirements set out in the directive.  

In addition, the report calls for a legal framework for ESNs, including the principles regarding 
dual  recourse,  asset  segregation,  bankruptcy  remoteness,  and  transparency  requirements. 
ESNs should also be exempted from bail-in.  

The  EU  parliament  favours  that  covered  bonds  will  only  be  backed  by  mortgages or  public 
sector loans, while ESN could finance riskier assets, such as SME loans, consumer credit, or 
infrastructure loans without a government guarantee. 

EP stayed close to COMM and EBA in relation to defining covered bonds. It also noted that 
covered bonds issued by credit institutions from third countries should get a similar regulatory 
treatment  if  the  legal,  institutional  and  supervisory  environment  is  equivalent  to  that  in  the 
EU. As such, the EU legislation could act as benchmark for the global covered bond market. 

8. Further stakeholder consultations  

111  European  Parliament  Report:  Bernd  Lucke  (A8-0235/2017),  "Towards  a  pan-European  covered  bonds 
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-

approved 

framework", 
//EP//TEXT+REPORT+A8-2017-0235+0+DOC+XML+V0//EN 

2017. 

July 

4th 

87 

 
 
 
                                                 
The Commission has  continued consulting  stakeholders through  meetings on key aspects of 
the proposal to help further substantiate the analysis of the available policy alternatives in line 
with Better Regulation guidelines. 

The  stakeholder  consultations  are  often  initiated  by  the  stakeholders  wanting  to  address 
specific issues of their concern and also wanting to keep up with the harmonisation process. 

8.1. Expert Group on Banking, Payments and Insurance (EGBPI) 

The EGBPI has discussed the possible harmonisation of covered bonds on two meetings, the 9 
June 2017 and the 28 September 2017. 

At the first meeting the overall intention to have a three step approach in accordance with the 
EBA  report  from  2016  was  presented  and  the  decision  announced  on  the  CMU  MTR  was 
introduced.  The  majority  of  the  Member  States  expressed  support  for  the  Commission 
approach  and  for  keeping  the  ESNs  as  a  separate  instrument.  In  general,  the  discussion 
focused upon the harmonisation to be in line with the well-functioning national systems, and 
therefore most Member States specifically demanded for a harmonisation based on high level 
principles, some referring to the EBA report to be too detailed. 

At the second meeting the discussion was more detailed, but in general Member States were 
still in support of the principles based directive leaving room for national implementation and 
not jeopardising the systems already working well. 

III. Stakeholder input included in the harmonisations process  

The stakeholder input can be grouped into two categories: 

1.  advice to change the existing framework to address concerns of a prudential nature 
2.  request of not disrupting the existing well-functioning national systems. 

Stakeholder  input  belonging  to  the  first  group  mainly  came  from  the  ESRB,  the  EBA,  the 
ECB and to some extent from the national competent authorities in the Member States with 
well-developed covered bond markets and from the rating agencies. 

Stakeholder input belonging to the second group mainly came from Member States with well-
developed covered bonds markets and from issuers and investors alike. They advocated  the 
Commission  being  very  careful  not  to  unduly  disrupt  those  markets  working  well,  while 
acknowledging  the  need  for  harmonisation  to  ensure  that  the  structural  features  of  covered 
bonds are well integrated in all existing and upcoming markets. 

To  include  both  types  of  stakeholder  input,  the  Commission  intends  to  define  the  structural 
features  of the covered bonds in  a directive, leaving  room for national implementation.  The 
Directive  will  be  principles  based  to  accommodate  the  wish  of  not  changing  the  well-
functioning market characteristics, but will include specific requirements addressing the areas 
considered necessary to ensure a prudentially solid framework. 

To  specifically  address  the  prudential  concerns  regarding  capital  preferential  treatment  the 
Commission  intends  to  make  targeted  amendments  to  the  CRR  art  129  thus  justifying  a 
continuous preferential treatment.    

88 

 
 
 
 
 
 
 
89 

 
 
 
 
ANNEX 3 - WHO IS AFFECTED BY THE INITIATIVE AND HOW?  

I. Practical implications of the initiative  

Under the retained option (option 2: minimum harmonization based on national regimes) 
a harmonized legal framework for covered bonds would be established at EU level. This EU 
framework  would  aim  at  a  minimum  level  of  harmonization  across  the  EU,  building  on  the 
characteristics  of  existing  national  jurisdictions  and  seeking  to  avoid  disrupting  well-
functioning markets. Under this option, the previous Article 52 of UCITS would be replaced 
by  a  new  Directive  defining  the  structural  elements  of  covered  bonds  and  Article  129  CRR 
would also be adjusted. This option will require Member States to transpose the new Directive 
into  national  legislation,  and  the  issuers  of  and  investors  in  covered  bonds  would  have  to 
adjust  their  businesses  to  changes  in  the  resulting  national  frameworks.  Grandfathering 
clauses would be foreseen for outstanding covered bonds.  

This option is supported by all stakeholders: institutional stakeholders, supervisors, Member 
States  and  industry  stakeholders  alike.  In  particular,  the  EBA,  the  ECB,  the  Parliament, 
national  and  European  supervisors  have  advocated  for  option  2.  This  is  the  option  that  fits 
with the EBA advice and the EP Report. A majority of Member States is also favourable to 
this option. Among them all the largest markets. The ECBC representing almost all issuers in 
the market and investors is also in favour of this option.   

2. Summary of cost and benefits 

Benefits  and  costs  of  option  2  for  each  category  of  stakeholders  have  been  summarized  in 
table 1. Main benefits refer to issuers who would enjoy a lowering of funding costs and for 
citizens who would enjoy in their turn lower borrowing costs as well. Investors would benefit 
from a stronger regime that better protects them, however some details left to Member States’ 
discretion  could  introduce  weaknesses  (for  example  in  the  relationship  between  extendible 
structures and liquidity buffer). Costs would increase for issuers and supervisors, while they 
would decrease for investors and society. 

Table 1– Impacts on different stakeholders of Option 2   

Issuers 

Investors 

Supervisors 

Citizens 

Benefits 

Costs 

↑↑ 

↑↑ 

↑ 

↓ 

↑ 

↑ 

↑↑ 

↓ 

Tables 2 and 3 present the typical benefits and costs deriving from the specific actions to be 
undertaken  in  order  to  implement  option  2.  Benefits  and  costs  are  described  for  different 
categories of stakeholders, as applicable. In some cases, it is not possible to quantify impacts, 
in  particular  at  a  high  level  of  detail.  Furthermore,  the  baseline  itself  varies  strongly  across 
countries  and  these  figures  are  not  available  in  most  cases.  The  exercise  in  the  following 
tables  will  therefore  mainly  follow  a  descriptive  approach  and  specific  actions  along  with 
their benefits and costs will be described in detail. 

90 

 
 
 
 
 
 
 
Table 2– Overview of benefits: preferred option   

I. Overview of Benefits (total for all provisions) – Preferred Option 

Comments 

Stakeholders who benefit 

a) issuers  

b) investors 

c) citizens 

Description 

Amount 

Direct benefits 

Defining common standards 
for CB structural features 

1.  Stimulate  the  development  of  CB  markets, 
increasing  issuance  (between  50%  and  75%  of 
additional EUR 342 bn) 

2.  Lowering  costs  of  funding  for  issuers.  At 
individual  level:  i.  funding  savings  of  30-45  bps 
where  CB  issuance  substitutes  unsecured  debt 
financing, ii. further funding savings of about 5 bps 
related  to  a  more  robust  framework.  At  aggregate 
level  funding  costs  savings  of  between  50%  and 
75%  of  the  benchmark  long-term  benefits  of  €2.2-
2.7 billion per year.  

3.  Diversify  investor  base  (60%  of  investors  other 
than banks) 

4. Facilitate cross-border investments 

5.  Attract  investors  from  third  countries  (16.5%  of 
investments  from  third  countries  for  additional 
EUR 115 bn in the long run from outside the EU) 

6. Strengthening investor protection 

7. Addressing prudential concerns 

principles 

Defining 
for 
eligible  cover  assets  and 
coverage requirements 

 1.  Strengthen  the  coverage  requirements  ensuring 
investors' rights 

Stakeholders who benefit 

2. Prudential benefits  

 3. Reducing due diligence costs for investors 

4. Encourage issuance by smaller banks  

a) investors 

b) issuers 

Define 
supervision 

special 

public 

1. Prudential benefits 

Stakeholders who benefit 

2. Strengthen investor protection 

a) investors 

Define 
requirements  

transparency 

1.  Reduced  due  diligence  costs  for  investors 
compared to the baseline 

Stakeholders who benefit 

a) investors 

Setting 
requirements 

liquidity 

1. Prudential benefits  

Stakeholders who benefit 

2. Strengthen investor protection 

a) investors 

Define criteria for EMS 

1.  Address  prudential  concerns  regarding  market 
innovation 

Stakeholders who benefit 

a) investors  

91 

 
 
 
 
2. Strengthen investor protection 

Setting  overcollateralization 
requirements  (between  2% 
and 5%) 

1.  Strengthen  investor  protection  in  jurisdictions 
with lower levels 

Stakeholders who benefit 

2.  Potential  reduction  of  OC  in  jurisdictions  with 
higher levels 

a) investors 

b) issuers 

Setting rules for derivatives 

1.  Strengthen  the  coverage  requirements  ensuring 
investors' rights 

Stakeholders who benefit 

2. Hedging of currency/other risks  

3. Prudential benefits  

a) investors 

b) issuers 

Other adjustments to art 129 
CRR 

1. Prudential benefits  

Stakeholders who benefit 

2. Strengthen investor protection 

a) investors  

Indirect benefits 

Defining common standards 
for CB structural features 

1.  Overall  savings  in  borrowing  costs  for  the  real 
economy  of  between  50%  and  75%  of 
the 
benchmark long-term benefit of €1.5-1.9 billion per 
year.   

Stakeholders who benefit 

a) citizens 

Setting  overcollateralization 
and LTV limits only in CRR 

1.  Reducing 
overcollateralization requirements  

pro-cyclicality  of  LTV 

and 

Stakeholders who benefit 

a) issuers 

b) citizens  

92 

 
 
 
 
 
Table 3– Overview of costs: preferred option   

II. Overview of costs – Preferred option(s) 

Citizens/Consumers 

Issuers/Investors 

Competent authorities 

One-off   Recurrent 

One-off  

Recurrent 

One-off  

Recurrent 

Direct 
costs 

NA 

  NA 

Defining 
common 
standards  for 
CB  structural 
features, 
cover 
and 
transparency 
requirements. 

asset 

Administrative 
and  compliance 
costs 
for 
implementing 
(IT 
changes 
legal 
system, 
advice, 
credit 
rating, etc.). MS 
with lower costs 
would  see  an 
to 
increase 
benchmark 
levels 
€590,000 
€1.8 mil. 

of 
to 

Indirect 
costs 

NA 

NA 

  Stronger 
cover 
assets 
requiremen
ts 
may 
reduce 
lending 
available 
for 
segments  

some 

NA  

NA 

NA 

NA 

Administrative 
and 
compliance 
costs  of  new 
rules 
(audit 
and 
management, 
monitoring 
fees, 
supervisory, 
licensing 
costs).  MS 
with 
lower 
costs  would 
see an increase 
to  benchmark 
levels 
of 
between 
€300,000  and 
€475,000/year. 

Need  of  more 
collateral  may 
reduce lending 
and 
increase 
asset 
encumbrance 

Define special 
public 
supervision  

Direct 
costs 

NA 

  NA 

NA  

NA  

Adjustment 
to 
supervision 
rules 

new 

Higher 
enforcement 
costs 
(licensing, 
monitoring 
and auditing). 
"Light touch" 
jurisdictions 
would 
towards 
benchmark  
€25,350 
of 
issuer-
per 
year  but  the 
majority 
of 
them  are  not 
to 
expected 
the 
hit 
benchmark.  

tend 
the 

93 

 
 
Indirect 
costs 

NA 

  NA 

NA 

NA 

NA 

New  liquidity 
requirements 

Direct 
costs 

NA 

  NA 

Indirect 
costs 

NA 

  NA 

New  criteria 
for EMS 

Direct 
costs 

NA 

  NA 

for 

Administrative 
costs 
implementing 
the  changes  (i.e. 
IT system) 

Higher  issuance 
/conversions  of 
covered 
EMS 
bonds 
(conversion 
costs of 0.05%).  

Administrative 
and  compliance 
costs 
for 
implementing 
the  changes  (i.e. 
legal advice) 

Indirect 
costs 

NA 

  NA 

NA  

Setting 
overcollaterali
zation 

Direct 
costs 

NA 

  NA 

Administrative 
and  compliance 
for 
costs 
implementing 
the  changes  (i.e. 
IT 
systems, 
legal advice) 

Indirect 
costs 

NA 

  NA 

NA  

Setting 
rules 
for derivatives 

Direct 
costs 

NA 

  NA 

Administrative 
and  compliance 
costs 
for 
implementing 
the  changes  (i.e. 
IT  systems  and 
legal advice) 

in 

1.  Costs  of 
carry  of  liquid 
the 
assets 
cover 
pool 
(depending  on 
level 
of 
interest rates) 

2.  Lowering 
the availability 
of liquid assets 

of 
Transfer 
liquidity 
risk 
on  investors  if 
EMS  covered 
bond issuance 

NA 

Shifting 
liquidity 
to investors 

risk 

Higher 
or 
lower  costs  of 
excess 
collateral, 
depending  on 
jurisdiction 

Increasing  or 
reducing 
the 
level  of  asset 
encumbrance, 
depending  on 
jurisdiction 

of 

Costs 
monitoring 
derivatives 
in 
the cover pool 

NA 

NA 

Adjust 
supervision 
to new rules  

NA 

NA 

NA 

Adjust 
supervision 
to new rules  

NA 

NA 

NA 

Adjust 
supervision 
to new rules  

NA 

NA 

NA 

Adjust 
supervision 
to new rules  

Indirect 
costs 

NA 

  NA 

NA  

NA 

NA 

NA 

94 

 
Other 
adjustments to 
art 129 CRR 

Direct 
costs 

NA 

  NA 

Administrative 
and  compliance 
costs 
for 
implementing 
the  changes  (i.e. 
IT  systems  and 
legal advice)  

of 

limits 

Costs 
monitoring 
LTV 
and 
substitution 
cover assets 

NA 

Adjust 
supervision 
to new rules  

Indirect 
costs 

NA 

  NA 

NA  

NA 

NA 

NA 

95 

 
 
 
 
 
ANNEX 4 – ANALYTICAL METHODS USED TO CALCULATE BENEFITS 

This  annex  presents  the  methodology,  the  assumptions  and  the  results  of  an  illustrative 
estimation  of the untapped potential of the EU covered bonds market in terms of additional 
issuance and funding cost benefits. The resulting figures should be considered as estimates of 
the  maximum  long-term  potential  annual  savings  in  funding  costs  for  a  fully  unified  EU 
covered bond market.  

The  estimates  of  funding  benefits  take  the  current  level  of  bank  lending  as  given.  This 
assumption is rather conservative, as the supply of bank lending could increase as a result of 
better funding conditions for banks. It is also worth noting that the impacts are expressed in 
gross terms. In particular, the impacts on: i. issuance costs at the level of the individual issuer 
and ii. supervisory costs, are not taken into account in this calculation. 

I. Calculation of benefit benchmark b: additional issuance of covered bonds 

The starting point for estimating the additional issuance potential is the definition of a simple 
benchmark  for  the  level  of  issued  covered  bonds,  expressed  relative  to  the  size  of  Member 
States'  banking  sector.  For  this  purpose,  this  analysis  first  calculates  the  ratio  of  total 
outstanding  covered  bonds  issued  in  each  Member  State,  divided  by  total  outstanding  loans 
issued by resident monetary and financial institutions excluding the Central bank.  

Next, the benchmark is defined as the median level of outstanding covered bonds among EU 
Member States considered as having an established covered bonds market.112 A median-based 
benchmark  is  again  a  rather  conservative  choice,  justified  by  the  objective  to  minimize 
negative effects of asset encumbrance on the issuers' risk for unsecured creditors. Indeed, by 
definition, one-half of Member States with established markets currently operate with higher 
levels of CB issuance.  

It is further assumed that under a fully unified EU framework, countries below the benchmark 
level  would  gradually  converge  to  this  value  in  the  long  run  (beyond  a  ten-year  horizon), 
whilst countries currently above the benchmark are assumed to remain at their current level. 
Lastly,  we  assume  that  covered  bond  funding  would  be  replacing  unsecured  debt  funding. 
These two long-term funding options can be seen as natural substitutes for financing secured 
long-term lending, as suggested for example by Illes et al. (2015, p. 10).113 The latter study 
also  confirms  that  all  EU  Member  States'  banking  sector  seem  to  have  sufficient  levels  of 
unsecured debt to be substituted by covered bonds.  

112 Countries labeled for the purposes of this estimation as "Established markets" are Denmark, Sweden, Spain, 
Portugal, Finland, Austria, Germany, France, Italy, Netherlands, Belgium, and Luxembourg (ordered by the 
relative  size  of  their  outstanding  covered  bonds  markets).  Countries  labelled  as  "Recent  markets"  are 
essentially the new Member States and countries whose covered bond frameworks have been introduced or 
significantly  amended  after  the  year  2000.  This  group  of  countries  is  composed  of  the  Czech  Republic, 
Slovakia,  Ireland,  Hungary,  Greece,  Cyprus,  Poland,  Bulgaria,  Estonia,  Croatia,  Lithuania,  Latvia,  Malta, 
Romania, and Slovenia.   

113 See A. Illes, M. Lombardi and P. Mizen (2015): 'Why did bank lending rates diverge from policy rates after 

the financial crisis?' BIS Working Papers No 486, February. 

 
 
 
 
 
                                                 
II.  Calculation  of  benefit  benchmark  c:  savings  in  terms  of  funding  costs  for  banks 
issuing covered bonds 

Funding benefits related to additional CB issuance 

According  to  Fitch  data,  covered  bonds  get  an  uplift  of  between  3  and  6  notches  in  credit 
ratings  in  80%  of  the  programmes  and  on  a  quarter  of  them  they  get  4  notches  uplift.  This 
represents  a  significant  improvement  in  credit  ratings.  The  significantly  better  credit  rating 
implies lower costs of funding for credit institutions114.  

The Commission services estimate115 that for a representative sample of EU banks composing 
roughly  35%  of  the  EU  market  for  covered  bonds,  the  cost  of  issuing  covered  bonds  is  on 
average 30bps to 45bps lower than for senior unsecured debt, other things being equal.116 As 
can be seen in Figure 1, this benefit is larger for bonds with longer maturities. In addition, as 
expected,  banks  with  lower  credit  ratings  benefit  more  from  issuing  covered  bonds  than 
highly  rated  banks.  For  one  bank  in  the  sample  the  reduction  in  funding  costs  from  issuing 
covered bonds is estimated to be up to 100bps.  

Figure 1.  Difference in funding costs (z- spread) for covered bonds compared to senior 
unsecured debt  

Source: Commission Services estimates. 

114  There  is  a  negative  relationship  between credit  ratings  and  interests  paid  to  investors: the  higher  the  credit 
rating, the lower the default risk and the lower the interest rate to be paid to investors.  
115 Estimates are achieved by comparing z-spreads of outstanding covered bonds with the z-spreads of similar (in 
terms of currency, type of bonds, amount issued and maturity) senior unsecured bonds for the same bank. A 
total  of  91  bonds  were  analysed  from  26  different  banks  across  9  EU  Member  States.  For  France  and 
Denmark,  we  compared  covered  bonds  issued  by  specialised  subsidiaries  with  similar  bonds  issued  by 
parent companies.  

116  According  to  the  German  association  of  Pfandbrief  Banks  (VdP),  spread  differentials  between  senior 
unsecured and covered bonds from a sample of selected large European covered bond issuers for securities 
with a 5 years maturity are even higher as they range between 60 and 70 bp. While it is true that covered 
bonds  are  more  expensive  to  issue  than  unsecured  debt,  VdP  estimates  that  the  breakeven  point  of  this 
spread  that  makes  issuing  covered  bond  not  profitable  anymore  is  around  20  basis  points.  However,  this 
break-even figure has not been taken into consideration when calculating gross benefits of issuing covered 
bonds instead of unsecured debt for issuing banks. 

97 

 
 
 
                                                 
These  estimates  were  obtained  by  comparing  the  z-spreads117  of  outstanding  covered  bonds 
with  similar  senior  unsecured  bonds  (same  currency,  type  of  bonds,  amount  issued  and 
maturity) for the same bank. A total of 91 bonds were analysed from 26 different banks across 
9  EU  Member  States.  For  France  and  Denmark,  covered  bonds  issued  by  specialised 
subsidiaries were compared with similar bonds issued by parent companies. 

The  funding  cost  differentials  of  30  bps  to  45  bps  are  used  to  estimate  the  overall  funding 
benefits  of  additional  CB  issuance  on  the  assumption  of  unchanged  yields  for  unsecured 
creditors.118  The  actual  benefits  could  be  closer  to  the  low-end  estimate  of  30  bps,  given 
possible effects of higher CB issuance on the perceived risk of less senior funding sources (as 
per a traditional Modigliani-Miller mechanism).  

The order of magnitude of the funding cost advantage of covered bonds relative to unsecured 
debt is confirmed by Illes et al. (2015). For 11 EU Member States, the study shows an average 
funding cost advantage for covered bonds of 82 bps before the global financial crisis, and 28 
bps during and after the crisis.  

Funding benefits related to reduced risk perceived by CB investors 

Funding  costs  benefits  related  to  higher  investor  confidence  under  a  more  predictable  and 
consistent  framework  across  all  EU  Member  States  are  more  difficult  to  estimate.  The 
external study funded by the Commission estimates these benefits based on expert judgment 
as multiple basis points, with 5 bps being a "relatively conservative estimate of the potential 
benefit".119 This value is used for the evaluation of the benefit of a stronger EU framework for 
covered bonds.  

Anecdotal  evidence  may  help  substantiate  this  point.  Proposed  amendments  to  Slovakia's 
covered  bond  legislation  aimed  at  addressing  weaknesses  in  the  current  framework  and  at 
aligning  it  with  European  best  practices  are  expected  to  come  into  force  in  January  2018. 
They would include credit strengthening characteristics (for example preventing an automatic 
acceleration  of  covered  bonds  when  the  issuer  is  under  insolvency  proceedings)  which, 
according  to Fitch, could induce the agency to improve the ratings of covered bonds issued 
under Slovakian law. At the same time, Fitch is concerned that other features of the proposal 
(for example the liquidity buffer) are weaker than in other countries and those aspects would 
need to be clarified before Slovakian covered bonds get the rating uplift. This example sheds 
some  light  on  the  potential  of  defining  clear  credit  enhancing  features  for  covered  bonds  at 
European  level  as  this  could  help  achieve  credit  enhancement  and  the  related  rating  uplifts 
across the whole EU. In turn, better ratings would translate into lower yields for issuers.  

117  Z-spreads  are  bond  spreads  that  take  into  account,  and  correct  for  where  necessary,  for  differences  in  the 
repayment of the principal of bonds. They are the most suitable spreads for comparison of different bonds.  
118 Birchler (2000) shows how introducing different levels of debt priority can reduce the overall cost of funding 
of  a  bank.  See  U.W.  Birchler  (2000):  "Bankruptcy  Priority  for  Bank  Deposits:  A  Contract  Theoretic 
Explanation", Review of Financial Studies, Vol. 13, Issue 3, pp. 813–840. 

119 ICF, 2017, p.55 

98 

 
                                                 
III. Results  

The  resulting  estimates  are  presented  in  Table 1.  Overall,  under  the above  assumptions,  the 
additional issuance potential for CB would be up to 342 EUR billion.  

This new issuance would entail an annual potential funding cost benefits between 2.2 and 2.7 
EUR billion in the long term.  

Using the estimated long-term pass-through rate by Illes et al. (2015) of about 70%, this could 
lead to potential annual savings for EU borrowers of 1.5 to 1.9 EUR billion in the long term.  

Table 1 – Illustrative estimation of additional issuance potential and funding benefits 

Source: Commission services. 
Note:  The  table  shows  a  simplified  estimate  of  the  additional  covered  bond  issuance  potential,  the  annual 
funding  cost  benefits  related  to  this  additional  issuance  (the  low  and  high  end  refer  to  a  30  bps  resp.  45  bps 
saving compared to unsecured debt), and the annual funding cost benefits related to a lower risk perception by 
investors owing to a stronger CB framework.       

99 

Low end High end (EUR bn)(% of loans)(EUR bn)(EUR bn)(EUR bn)(EUR bn)Denmark391,161,1%0,00,000,000,20Sweden222,428,5%0,00,000,000,11Spain259,315,9%0,00,000,000,13Portugal33,513,8%0,00,000,000,02Finland33,810,9%0,00,000,000,02Austria48,09,0%0,00,000,000,02Germany373,88,0%25,00,080,110,20Ireland23,87,7%2,60,010,010,01France308,66,7%81,80,250,370,20Italy146,66,0%60,20,180,270,10Netherlands67,64,9%50,90,150,230,06Belgium19,03,4%28,60,090,130,02Luxembourg7,91,8%29,50,090,130,02Czech Republic13,18,8%0,00,000,000,01Slovakia4,28,2%0,20,000,000,00Hungary2,23,5%3,10,010,010,00Greece4,52,1%13,30,040,060,01Cyprus0,71,0%4,90,010,020,00Poland2,20,8%21,20,060,100,01Bulgaria0,00,0%2,90,010,010,00Estonia0,00,0%1,90,010,010,00Croatia0,00,0%3,60,010,020,00Lithuania0,00,0%1,80,010,010,00Latvia0,00,0%1,60,000,010,00Malta0,00,0%1,40,000,010,00Romania0,00,0%5,30,020,020,00Slovenia0,00,0%2,30,010,010,00Total established278,60,841,251,11Total new markets63,40,190,290,05Total342,01,031,541,15Established marketsNew marketsCB outstanding CB outstanding Additional issuance potential Annual benefit of increased issuanceAnnual benefit of stronger regime  
 
 
 
 
 
ANNEX 5 – FURTHER DATA AND EXPLANATIONS (COSTS) 

I. Costs of setting up and running a covered bond programme for an issuer 

There  are  significant  upfront  and  ongoing  costs  involved  in  establishing  and  running  a 
covered bond programme. These costs are a function of several factors such as: (i) the size of 
the covered bond programme of an issuer;  (ii)  the structure of the covered bond issuer. For 
example,  issuance  from  a  specialist  credit  institution  involves  significant  additional  costs 
when  compared  with  issuance  from  universal  credit  institutions;  and  (iii)  country  specific 
factors such as legal and supervisory requirements.  

This section compiles data from various sources (online survey, OPC responses, Credit Rating 
Agencies  and  supervisors)  collected  by  ICF  to  provide  estimates  of:  (a)  the  initial  costs  of 
setting-up  a  covered  bond  programme;  (b)  the  ongoing  (annual)  costs  of  running  a  covered 
bond programme; and (c) the costs of single issuance. It also compares the costs of covered 
bonds issuance as compared to other collateralised instruments. 

1. Upfront costs of establishing a covered bond programme 

The upfront costs of setting up a covered bond programme comprise: 

  The cost of setting up IT systems to support the administration and management of the 
programme  including  risk  management,  monitoring  and  reporting  of  the  cover  assets 
etc. (see table below); 

  Legal fees including the cost of a prospectus (see table below); 
  Application  and  registration  fees  i.e.  the  cost  of  registering  the  programme  with  the 

 

regulator or supervisor (see table below); 
Investment bank fees - these are typically a function of maturity of the bond e.g. for a 
standard five year deal,  investment banking fees would be of the order of 0.2% of the 
amount  raised.  Sometimes,  an  issuer  does  not  pay  any  fees  on  the  basis  of  an 
agreement  that  the  issuer  will  use  the  investment  bank  for  the  first  few  bond  deals 
and/or give that bank a disproportionate amount of the total fees payable on them120. 
  Rating  agencies’  fees  -  a  minimum  set-up  and  first  issuance  fee  of  €65,000  (limited 
approach)  to  €100,000  (full  approach)  for  CEE  issuers  and  €70,000-  €150,000 
(Western Europe) is charged by Fitch Ratings. S&P charges a standard fee €85,000 for 
annual surveillance of a covered bond programme. 

Table 1. 

Covered bonds programme set-up costs: IT, legal and regulatory costs (based on survey 
responses) 

Belgium 

Denmark 

Finland 

France 

 IT costs  

 Legal fees  

 Application & 
registration fees  

 ~ €100,000  

 ~€250,000  

 ~€10,000  

  €2 - 3.5 million  

 €100,000 - €150,000  

 *  

 ~ €1 million  

 €0.5 - 1 million  

 ~€1,000  

 ~ €1 million  

 €0.5 - 1 million  

 ~€5,000 (AMF) 

120 When a bond is launched typically three banks will run it for the issuer, each will get one third of the fees 
(€1bn bond x 20cent fees = €2mn / 3 banks = €666k each). Sometimes if one structured the programme the 
issuer might announce that the fee split is €1mn for the structurer, €0.5mn for the other two banks. The total 
fees paid don’t change but the structuring got recognised with a fee of €333k 

100 

 
  
                                                 
 IT costs  

 Legal fees  

 Application & 
registration fees  
€13,000 - €110,000  

Germany 

Hungary 

Italy 

 "substantial"  

 "millions"  

€5,000 - €20,000  

 :  

 :  

 ~€3,000  

 €150,000 - €1 million  

 €200,000 - €300,000  

 €8,000 - €10,000  

Luxembourg 

 €30,000 - €200,000  

 :  

 :  

The Netherlands 

 €100,000 - €300,000  

 €150,000 - €350,000  

 €10,000 - €25,000  

Poland 

Portugal 

Sweden 

 :  

 €250,000 - €300,000  

 :  

 ~ €30,000  

 €20,000 - €350,000  

 €3,000 - €5,000  

 €3 - 5 million  

 €50,000 - €2 million  

 €10,000 - €50,000  

 €100,000 - €2 million  

 €550,000 - €1.2 million  

The United Kingdom 
Source: ICF survey, n=40 
*Danish institutions do not pay explicitly for a license. The institutions under the supervision of Danish FSA pay 
for  supervision  in  a  broad  sense  according  to  specific  formulas  for  allocating  the  total  costs  of  running  the 
Danish FSA to the different segments of institutions and within these different institutions in the specific segment. 
E.g. in a given year a mortgage credit institution under supervision applies for a license to issue covered bonds. 
This generates costs for the Danish FSA but these are not directly allocated to the institution in question; they 
are part of the total costs of DFSA allocated according to the system mentioned above. There is only a charge to 
an institution as such, and this is for the relative share of the cost of running the Danish FSA irrespective of the 
amount of bond issues that it makes. 

 €27,500 - €50,000  

Overall, set-up costs range from hundreds of thousands to a few million euros across various 
EU jurisdictions.  

2. Ongoing costs of running a covered bond programme 

The annual costs of running a programme, as indicated by respondents to the ICF survey, are 
indicated in the table below. 

Table 2. 

Annual costs of running a covered bond programme (based on survey responses) 

 IT costs  

 Legal fees  

Cover pool 
monitor  

 Audit fees  

Other 
supervision 
and regulatory 
costs  

Belgium 

 ~ €10,000  

 ~ €25,000  

 ~ €80,000  

 ~ €50,000 (at start)   :  

Denmark 

 ~ €2 million  

 €10,000 - €50,000  

 :  

 ~ €70,000  

~€100,000 

Finland 

France 

 €150,000 - 
€200,000  

 €50,000 - 
€400,000  

Germany 

 ~ €150,000  

Hungary 

Ireland 

Italy 

 :  

 :  

 :  

 ~ €100,000  

:  

 ~ €30,000  

 ~ €20,000  

 €40,000 - €150,000  

 €65,000 - 
€120,000*  

 €100,000 - 
€850,000  

 ~ €300,000  

 :  

 :  

 €30,000 - 50,000**    ~ €125,000*** 

 ~ €90,000  

 :  

 : 

 ~ €300,000  

 ~ €200,000  

 ~ €100,000  

 €1 million  

 €25,000 - €110,000  

 €20,000 - €60,000  

 €10,000 - €130,000  

 €10,000 - 
€20,000  

 : 

Luxembour

 :  

 :  

 ~ €30,000  

 :  

101 

 
  
  
 IT costs  

 Legal fees  

Cover pool 
monitor  

 Audit fees  

Other 
supervision 
and regulatory 
costs  

g 

The 
Netherlands 

 €10,000 - 
€100,000  

 €40,000 - €250,000  

 €10,000 - €40,000  

 €10,000 - €60,000  

 €5,000 - €25,000  

Portugal 

 ~ €5,000  

 €10,000 - €80,000  

 €25,000 - €30,000  

 €30,000 - €75,000  

 €10,000 - 
€12,500  

Sweden 

The United 
Kingdom 

 €100,000 - 
€750,000  
 €60,000 - 
€240,000  

 €7,500 - €500,000  

 ~ €50,000  

 €10,000 - €50,000   €5,000 - €75,000  

 €60,000 - €180,000  

 €10,000 - €50,000  

 ~€120,000  

 €120,000 - €2.2 
million  

Source: ICF survey, n=41 
* Appointing a Specific Controller is compulsory under French law. The Specific Controller is an audit firm 
different from the legal auditors of the CB Issuer or the parent group of the CB Issuer. The Specific Controller 
not only acts as a cover pool monitor but has wider functions. The annual cost of appointing a Specific 
Controller ranges from €50,000 to €300,000 depending of the size and complexity of the issuer (source: French 
controleur specifique).  
** see annex X. The higher range applies to a large issuer with two alternate monitors 
***includes cost of on-site cover pool audits which range from €10,000 for small savings banks to 6-digit 
amounts (at approx. €100,000) for major Pfandbrief banks, carried out by leading auditing firms. Additional 
supervision costs might include mandatory statements by chartered external auditors on appropriate 
organisation of the Pfandbrief business in the annual report + costs of internal control of observing the limits 
under the Pfandbrief Act + costs of coverpool insertion + lists of coverpool assets to be sent to BaFin. Some 
issuers carry out internal audits by their compliance departments, but this is not mandatory. 

Aside from above, issuers have to pay a fee to Credit Rating Agencies for annual surveillance 
of a covered bond programme. As indicated in the previous section, S&P charges a flat fee of 
€85,000 per programme. The fee charged by Fitch Ratings depends  on the region  and asset 
cover pool size – see table below. 

Table 3. 

Annual programme fees charged by Fitch Ratings (full approach) 

 Assets  

Western Europe  

Upto and including €2.5 billion 

€2.5 – 5 billion 

€5 – 10 billion 

€10 – 15 billion 

€15 – 25 billion 

€75,000 

€85,000 

€95,000 

€105,000 

€115,000 

 CEE  

€40,000 

€50,000 

€60,000 

€80,000 

€80,000 

> €25 billion 

€130,000 
Source: 2017 S&P fee schedule. For a limited approach, the fees are €50,000 for Western European issuers and 
€40,000 for CEE issuers regardless of asset cover pool size 

€80,000 

Survey respondents also indicated the following additional costs: 

  Staffing costs for running the covered bond programme ; 
  Cost of back office operations – these can be expected to be negligible once a covered 
bond programme has been set-up involving monthly running of reports or checking of 
accounting  entries.  Smaller  issuers  with  less  sophisticated  IT  systems  might  need  to 
carry out manual intervention, in which case these would involve at most 0.5 FTE; 
  Cost of professional bodies e.g. ECBC (€8,000 per year) and national industry body; 

102 

 
  
  Cost of the covered bond label comprising121: 

- 
Initial Registration fee of €5,000 payable with the registration of a new cover pool 
-  Annual  Label  fee  of  €3,800  in  subsequent  years  where  issuers  will  confirm/re-

confirm their compliance to the Label Convention; 

-  An  additional  volume  issuance  fee  of  €1  per  million  of  new  issuance  (capped  at 

€5,000 per year; not payable on the first year of a new Label). 

  The fees and expenses of the Bond Trustee and Security Trustee (if any), ranging from 

€7,500 to €72,600 

3. Cost of single issuance 

The following costs are associated with each issuance: 

  Rating fees: Fitch rating charges fees on all covered bond issuance as a percentage of 
the  total  issue  size.  The  fees  range  from  0.25  bps  (limited  approach)  to  1.0  bps  (full 
approach)  in  Western  European  countries.  A  flat  rate  of  0.5  bps  is  charged  in  CEE 
countries. It should be noted that issuers often get 2-3 ratings for their issues; 

  Legal fees per issue is typically either nothing or a very small amount, but for a small 
number of issuers (in particular those who do not issue from a standard programme), 
these could range from 100,000 to €300,000; 

  The fees and expenses incurred or payable in connection with the listing of the covered 
bonds on stock markets. These can range from €4,000 in UK to €150,000 in Sweden. 
  Fees  relating  to  ISDA  documentations  (Swaps),  which  depends  upon  the  number  of 

counterparties an issuer has; 
In Hungary, audit fees are payable per issuance (~ €20,000 per issue). 

 

4. The costs of covered bonds issuance as compared to other collateralised instruments 

As indicated earlier, the upfront costs of establishing a covered bond programme amount to at 
least €0.5 million and are actually much higher in several EU jurisdictions. The ongoing costs 
are also high, ranging from €0.25 million to a few million euros. 

According  to  many  respondents  to  the  OPC,  although  the  costs  of  setting  up  and  running  a 
covered  bond  programme  are  higher  than  other collateralised  instruments  in  absolute  terms, 
these can be spread across several issues, which eventually results in lower operational costs 
for covered bonds as compared to securitisations. Many respondents stated that the advantage 
of a covered bond programme is that once set up and registered, multiple transactions can be 
issued under the programme i.e., each new issuance benefits from the existing structure of the 
covered  bond  programme  and  bears  only  a  fraction  of  the  costs.  In  contrast,  for  each  new 
ABS/RMBS  issue,  set  up  cost  have  to  be  incurred.  Covered  bonds  are  thus,  regarded  as  a 
more efficient funding tool by market participants. 

The  specific  cost  advantages  of  a  covered  bond  programme  over  securitisation  transactions 
are as follows: 

  All  covered  bonds  issued  under  a  specific  jurisdiction  adhere  to  the  same  legislative 
requirements,  whereas  each  securitisation  transaction  is  a  unique  instrument  with 
unique  contractual  agreements.  Consequently  for  securitisation  transaction,  an  issuer 
has to incur costs relating to due diligence of the portfolio; creation and maintenance 

121 Covered bond label website: https://www.coveredbondlabel.com/procedures-label-fee [accessed 18.02.2017] 

103 

 
 
                                                 
of ad hoc structures such as SPVs; developing legal documentation; and advisory and 
rating costs (which are usually much higher for securitisation transactions as compared 
to covered bonds122).  

  The  ability  to  provide  a  single  investor  reporting  for  an  entire  covered  bond 

programme is less costly as compared individual securitisations.  

  A single swap covering a covered bond issue is also less costly than multiple swaps for 

heterogeneous securitisation transactions.  

  Securitisation transactions often involve the constitution of the legal entity (SPV) and 

the need for two different credit ratings, which implies additional costs. 

Finally, from an investor’s perspective, due diligence costs are lower for covered bonds as it 
is a more standardised product compared to securitisations. 

II. Cost of supervision 

Within the framework of this study, detailed data was also collected from supervisors in three 
jurisdictions representing different supervisory regimes. The findings are reported below. 

1. Denmark 

The key tasks from the supervisory perspective in the Danish context entail the following123: 

Issuance of license – one off covered bond specific licensing;   

 
  Period review and analysis of the data/ documentation provided by the issuer;124 
  Periodic quality check of cover assets including checks on eligibility of assets and real 
estate valuations practices and outcomes (NB: This includes regular on-site visits) 
  Periodic Monitoring of the exposure of the covered bond programme to market risk 

and liquidity risk; 

  Periodic checks of minimum mandatory over collateralisation requirements; 
  Evaluation of operational risks of the issuer. 

Supervision of mortgage credit institutions is carried out by the Danish FSA. The basic rule is 
that the institutions under supervision pay for the costs associated with their supervision. The 
cost of running the Danish FSA is therefore, allocated to the different units under supervision 
based on different measures. In practice there is an allocation to each group of institutions in 
question,  e.g.  mortgage  bank,  universal  bank,  insurance  company,  investment  fund,  etc. 
Within  these  groups  the  allocated  costs  are  further  allocated  based  on  different  measures. 
Mortgage  banks  as  a  group  pay  13.2%  of  the  annual  costs  of  the  Danish  FSA.  Additional 
fixed fees apply to certain units under supervision, although these are largely insignificant in 
comparison.  Within  the  group  of  mortgage  banks  this  amount  is  divided  between  the 
mortgage banks according to their total assets. 

As  a  rough  estimate,  circa  17  FTEs  across  different  departments  of  the  Danish  FSA  are 
involved in supervising covered bond programmes (of which roughly 3.5 FTEs are involved 

122  This  is  because  securitisation  transactions  are  more  complex,  involving  the  creation  of  ad  hoc  structures, 
leveraged nature of tranche-structures (several tranches which are collateralised by the same asset pool are 
rated separately) 

123  ECBC,  2017.  Comparison  of  frameworks.  Available  at:  http://www.ecbc.eu/framework/freeCompare  and 
EBA,  2014.  EBA  Report  on  EU  Covered  Bond  Framework  and  Capital.  Available  at: 
https://www.eba.europa.eu/documents/10180/534414/EBA+Report+on+EU+Covered+Bond+Frameworks+
and+Capital+Treatment.pdf  

124  For  instance,  reports  of  mortgage  banks  to  the  Danish  FSA  are  provided  on  the  quarterly  basis  and  cover 

credit risk exposure, market risk exposure and solvency 

104 

 
                                                 
in  on-site inspections of covered bond issuers). The average salary cost per FTE is  650,000 
DKK (~ €87,400). In addition, the average overhead per FTE is 390,000 DKK (~ €52,450). 
The annual costs incurred by the Danish FSA can be estimated at ~ €2.4 million. Considering 
that there are 9-10 issuers in Denmark, the average cost of supervision works out as €237,745 
-  €264,161.  The  average  cost  per  covered  bond  programme  can  be  estimated  as  €103,367 
(based on ECBC data on the number of programmes = 23 in 2014 and 2015). 

2. France 

The supervisory regime for covered bonds comprises several entities. Some with no specific 
role in relation to covered bonds and some with a specific role. 

The two bodies with no specific role in relation to the covered bond framework are: 

  AMF (Market supervisor): since as issuers of debt securities, covered bond issuers 

have to prepare a prospectus and submit it for AMF approval.  

  Legal/ statutory auditors: as credit institutions, covered bond issuers need to have two 

legal auditors of their accounts. 

The two bodies with specific roles in relation to the covered bond framework are the ACPR 
and the Specific controller, which will be the focus of this section. 

Regulatory Supervisor (ACPR) 

The main functions of the ACPR are: 

 

  Approval of the establishment of the CB Issuer/program 
  On-going supervision (based on quarterly and annual regulatory reports received from 
the Specific Controller, interviews and due diligences of the Specific Controller) 
Investigation rights: on-site inspections of covered bond issuers by the ACPR itself are 
not frequent (for illustrative purposes, it can be assumed that over a ten-year period, a 
covered bond issuer would typically have one chance in three to be inspected). In case 
they are performed though, these are in-depth inspections lasting several weeks or 
months.  

The  regular  inspections  are  carried  out  by  the  Specific  Controller  who  then  reports  to  the 
ACPR. 

At the ACPR, the special public supervision of the CB issuers is  conducted by the banking 
supervision  teams,  along  with  their  supervision  under  CRD4-CRR  (covered  bonds  issuers 
being  credit  institutions  in  French  law).  Estimates  of  costs  pertaining  specifically  to  CB-
specific  public  supervision  are  not  readily  available  (as  there  are  no  CB  dedicated  teams  / 
individuals and costs do not appear separately in ACPR analytical accounting). 

As credit institutions under French law, covered bond issuers are subject to the same fees as 
any  other  credit  institution  (or  “contribution  pour  frais  de  contrôle”)  according  to  article 
L.612-20 of the Code Monétaire et Financier. In this case, being a CB issuer does not imply 
specific  treatment  and  the  amount  is  not  related  to  the  work  done  by  the  supervisor  for 
monitoring the cover pool of covered bond issuers. 

Specific Controller (art. L.513-23 of CMF)  

105 

 
The  existence  and  appointment  of  the  Specific  Controller  is  enshrined  in  the  French 
legal/regulatory  covered  bond  framework:  he/she  is  not  appointed  following  a  contractual 
agreement with the issuer as is frequent for cover pool monitors in other jurisdictions. 

Although part of the public supervisory regime, the Special Controller is a staff member of a 
private audit firm (different from the firm auditing the accounts of the CB Issuer or the parent 
group  of  the  CB  Issuer  to  guarantee  independence  and  absence  of  conflict  of  interest).  The 
Specific  Controller,  a  professional  registered  to  the  CNCC  (French  Audit  Association),  is 
chosen by the issuer after approval from the supervisor (ACPR). 

The fees of  the Specific Controller are 100%  charged to  the Issuer. These costs range from 
€50,000 to €300,000 per year depending of the size and complexity of each issuer. 

The responsibilities of the Specific Controller (wider than the tasks of cover pool monitors in 
other countries as he/she undertakes part of the tasks typically undertaken by the supervisor) 
are as follows: 

  Controls the eligibility of cover pool assets based on tests conducted on a 
representative sample of cover pool assets (generally on annual basis) 

  Controls issuer’s compliance with the regulatory calculation requirements: OC, 

liquidity buffer, maturity gap, coverage plan on a quarterly basis and issues a quarterly 
review certification 

  Controls the compliance of valuation methods applied to cover assets (properties) for 
cover pools based on home loans (annual certification, which is disclosed with the 
financial statements of the CB Issuer) 

  Must alert the supervisor and the management if the matching in terms of maturity, 
currency or interest rate appears excessively unsafe and jeopardizes the bondholders 
  Delivers pre-issuance controls ensuring that new forecasted issuances would not entail 

a breach of any regulatory requirements (on a quarterly basis; quarterly review 
certification + specific review certification for each issuance > €500 million). 

Germany 

Licensing  

Fees  are  levied  for  certain  activities  in  relation  to  Pfandbrief  business  (cf.  specifically 
section 2  of  the  schedule  of  fees,  appendix  to  FinDAGKostV,  http://www.gesetze-im-
internet.de/findagkostv/anlage.html, German only), most relevant are: 

 

 

the fee for extending the license to conduct Pfandbrief business (for establishment of 
credit institution including Pfandbrief business the fee for the entire licensing process 
ranges between €5,000 and 20,000; for the more common case of extending an already 
existing license to also include Pfandbrief business, the fee is 25% to 100% of the 
“establishment” fee), and 
the fee for appointing a cover pool monitor (first-time appointment €305; extension of 
appointment €140). 

106 

 
The  rest  of  the  existing  Pfandbrief-related  types  of  fees,  typically  in  relation  to  BaFin’s 
waiving  of  certain  requirements  as  provided  for  by  the  Pfandbrief  Act,  have  no  practical 
relevance.  Beyond  this,  no  specific  attribution  of  costs  to  Pfandbrief  banks  for  Pfandbrief-
related  supervisory  activities  applies;  these  costs  thus  are  borne  by  way  of  all  supervised 
in  BaFin’s  costs  not  yet  borne  otherwise 
entities  being  apportioned  a  share 
(“Umlagefinanzierung”). 

Cover pool monitor (annual) 

In Germany, the cover pool monitor (CPM) is appointed by BaFin. S/he is not BaFin staff, but 
an independent individual. The CPM is remunerated according to fees set by BaFin, as well as 
reimbursement  of  necessary  expenses,  in  both  instances  to  be  paid  by  the  Pfandbrief  bank. 
The  Pfandbrief bank is prohibited to award any additional benefits to the CPM. The scheme 
for setting CPM’s compensation on a monthly basis is composed of a fixed amount (€700), a 
variable  add-on  in  response  to  Pfandbriefe  in  circulation  (the  variable  add-on  amount  is 
expressed as a %-point of the fixed amount; ranges from 0% - circulation below €1,000mn  to 
175% for circulation above €30,000mn), and a premium (+25%-points in case of cover pools 
composed mainly of complex CRE financings or complex public sector financings or a very 
high  number  of  retail  RRE  financings;  individually,  the  premium  rate  may  be  set  at  +50%-
points if thoroughly justified) or rebate (-25%-points in case of non-complex ship financings 
or other large lot-size financings, or to compensate for high degree of work participation of 
deputy CPM) for certain individual aspects applicable to the variable add-on. The maximum 
compensation without individual adjustments thus amounts to a fixed amount of €700 + 175% 
of  fixed  amount  €1,225  =  €1,925  Euro  for  circulation  above  €30bn.  The  monthly 
remuneration of a CPM thus, varies between € 700 and 1,925.   

On-site cover pool audits (conducted at two two-year intervals) 

Department  BA 57  at  BaFin  is  responsible  for  conducting  cover  pool  audits  at  Pfandbrief 
banks  at  two  year  intervals,  either  using  its  own  staff  (appraisers),  or  CPAs,  experienced  in 
the area of Pfandbrief cover pool audits (selected through a tendering process). Cost incurred 
due to a cover pool audit (ordered by reference to sec. 44 par. 1 of the Banking Act), are fully 
recoverable  from 
institution,  cf.  sec. 15  par. 1  no. 1  FinDAG 
(http://www.gesetze-im-internet.de/findag/__15.html, German only).  

the  audited  credit 

In case of cover pool audits performed by BaFin’s own staff, the costs of cover pool audits, 
including  travel  expenses  and  offsite  quality  assurance  activities  are  debited  to  the  audited 
Pfandbrief bank.  

In  the  latter  case,  BaFin  launches  and  evaluates  the  tender,  appoints  a  CPA  to  conduct  the 
audit,  evaluates  the  audit  report,  initiates  transmission  of  the  audit  report  to  the  audited 
Pfandbrief  bank,  and  carries  out  any  follow-up.  Although  BaFin  commissions  the  audit 
contract, the auditing CPA typically is paid directly by the audited Pfandbrief bank. 

Table 4. 

Cost of cover pool audits conducted at two year intervals, 2015 

Number of cover 
 pool audits 

Total costs 

Average costs 

CPA* 

own staff 

17 

8 

€718,000 

€224,000 

107 

€42,000 

€28,000 

 
 
Source: BaFin. Due to reorganisation of department BA 57 in 2014, and data for financial year 2016 not having 
been finalised, the following data have been compiled for 2015. * refers to tenders completed in 2015 

BA 57 total (100% FTE) budget for 2015 (with approximately 78% FTE dedicated for cover 
pool audit and supplementary functions) was as follows: 

  Direct costs: €1.55 million (of which direct staffing costs: €1.51 million) 
  Overhead costs: €1.18 million 

The costs not recovered from Pfandbrief banks are funded as part of BaFin’s general budget 
(i.e. via cost allocation to supervised entities, where being a Pfandbrief bank would not imply 
specific treatment). 

108 

 
 
 
 
ANNEX 6 – IMPLEMENTING THE RETAINED OPTION 

4. 
The tables below describe the detailed provisions under the retained option specifying 
for  each  of  them  whether  and  how  they  deviate  from  the  EBA  2016  Report  and  how  they 
differ from the current situation in Member States where a legal covered bond framework is in 
place.  

Retained 

5. 
Option 
harmonisation 
directive) 

(minimum 
via 

6. 

EBA 

Explanatio

7. 
n for deviating from 
EBA 

Situation 

8. 
in  Member  States 
(MS) 

9. 
on impacts on MS 

Comments 

10. 

Dual recourse 

11. 
difference 

No 

12. 

NA 

13. 
compliant 

All  MS 

Simila

16. 
r  approach  on 
structural 
the 
but 
feature, 
limited 
deviations 
operational 
plans  envisaged 
by the EBA. 

for 

Very  high 
of 

18. 
level 
compliance 
regarding 
structural features 

the 

to 

17. 
No 
requirements 
for 
operational  plans  in 
be 
order 
principles based and 
any 
to 
avoid 
duplication 
with 
resolution 
BRRD 
plans.  

21. 
approach 

Same 

22. 

NA 

Main 

23. 
assets:  mortgages; 
public loans, ships, 
aircraft.  Some  MS 
smaller 
have 
amount 
less 
traditional assets.  

of 

a 

No 

14. 
significant 
changes 
for  the  majority  of 
MS 

No 

19. 
significant 
changes 
for  the  majority  of 
MS 

25. 
some 
For 
MS  there  could  be 
in 
limitations 
comparison 
with 
current situation. 

27. 
For the 
EBA  is  step  3 
(voluntary 
convergence) 
based 
COMM 
equivalence. 

on 

32. 
mentioned 

Not 

24. 

29. 
of compliance  

High level 

30. 
Minor 
changes  foreseen  for 
some MS  

in 

We 

28. 
the 
regulate 
for 
Directive 
reasons 
prudential 
leave 
we 
and 
decisions  to  MS  for 
efficiency reasons.  

33. 
relevant 
prudential. 

More CMU 
than 

34. 

NA 

Important  to 
for  business 

35. 
have 
models in some MS 

Bankruptcy 

15. 
remoteness  of  covered 
bonds 

20. 
Eligible  assets 
to 
(define  principles 
limit  assets 
to  high 
quality only, not listing 
assets  in  the  Directive, 
only in the CRR) 

26. 
Assets  located 
outside 
EU 
(allowed  under  control 
by CAs) 

the 

Intragroup  CB 
funding 

joint 

31. 
and 
(allowed) 

36. 
cover assets 

Segregation  of 

37. 
approach 

Same 

38. 

NA 

39. 
MS compliant 

Nearly  all 

40. 
Concentrate
d impact in a few MS 

41. 
Derivatives  in 
the cover pool (allowed 
for  hedging  purposes 
of 
only 
and 
and 
segregation 

part 

EBA 

42. 
more  detailed 
coverage 
on 
requirement 
calculations 

43. 
Less details 
as  we  want  to  be 
principle based 

44. 
of compliance  

High level 

No 

45. 
significant 
changes 
for  the  majority  of 
MS 

109 

 
 
 
coverage requirements) 

46. 
pool 
Cover 
monitor  (optional  and 
details left to MS) 

Transparency 

51. 
and 
(strengthened 
moved  from  CRR  to 
Directive) 

Coverage 

56. 
requirement 
method as floor) 

(nominal 

and 
eligibility 
criteria 
counterparties 

on 

for 

49. 
The 
majority of MS has 
a  mandatory  cover 
pool  monitor.  The 
rest  have  the  tasks 
performed  by  the 
special 
public 
supervisor.  

50. 
Costs  only 
for  countries  where 
is  not 
the  monitor 
currently 
envisaged 
and  who  choose  to 
make it mandatory.  

47. 
The 
requires 
EBA 
this 
as 
mandatory  and 
the 
requires 
details 
on 
appointment, 
eligibility 
and 
criteria 
main duties and 
powers 
to  be 
defined  in  the 
Directive.  EBA 
acknowledges 
tasks 
of 
monitor  to  be 
performed 
by 
special  public 
supervisor.    

Emphasis 

48. 
on the special public 
supervisor  as 
the 
ultimate  responsible 
investor 
for 
protection  and 
to 
avoid  confusion  on 
supervisory 
responsibility.  Need 
to 
principles 
based  and  to  avoid 
listing  details  in  the 
directive 
on 
appointment, 
eligibility  and  main 
duties and powers of 
the monitor. 

be 

in 
of 

Same 

52. 
approach 
terms 
frequency, 
details 
directive level 

and 

53. 

NA 

55. 

Limited.  

Impact 

54. 
mainly  relating  to 
frequency.  HTT 
already 
ensuring 
common high level 
of transparency.  

57. 
approach 

Same 

58. 

NA 

59. 
of compliance 

High level 

60. 

Limited. 

65. 
not 
impact is limited. 

As  LCR  is 
the 

affected, 

63. 
We  do  not 
want to touch on the 
LCR,  we  want  to 
any 
avoid 
duplication  with  it 
ensure 
and 
compliance 
with 
LCR provisions.  

64. 
All  MS 
currently 
have 
some  liquidity  risk 
mitigation 
requirements 
place.  

in 

Liquidity 

61. 
buffer  (to  cover  180 
days 
no 
with 
overlapping with LCR) 

Same 

62. 
for 
approach 
the  size 
(180 
days),  position 
in 
to 
relation 
coverage 
requirements 
and 
segregation, 
exceptions. 
Differences 
concerning  the 
composition  of 
the 
buffer, 
valuation, 
interaction  with 
LCR.  The  EBA 
envisages 
a 
further 
assessment. 

Extendable 

66. 
maturity 
structures 
(triggers effected not at 

67. 
approach 

Same 

68. 

NA 

69. 
2 
Only 
MS 
a 
having 
framework in place 

70. 

110 

 
 
the  discretion  of  the 
issuer) 

71. 
Special  public 
(with 
supervision 
national  authorities  not 
linked  with 
credit 
institution supervision) 

73. 

NA 

Same 

72. 
approach 
concerning  the 
content  of  the 
supervision.  No 
mention  of  the 
level  whether 
EU or national. 

concerning 
extendable 
maturity structures. 

For  some 
supervision 
to  be 

74. 
MS 
will  have 
strengthened.  

75. 
This  would 
imply  increased  costs 
in 
where 
currently  supervision 
is too light. 

MS 

76. 
Permission  to 
issue  CB  (by  special 
supervisors) 

77. 
approach 

Same 

78. 

NA 

79. 
a 
For 
number  of  MS  the 
permission 
framework 
have to change.  

will 

80. 
imply 
costs. 

This  would 
increased 

81. 
EU 
(coexisting 
national 
specifically granted) 

labels, 

label 
with 
not 

82. 
envisaged 

Not 

83. 

NA 

84. 
g 

Coexistin

85. 
costs 

No  specific 

Equivalence 

86. 
regime  (postponed  to 
review  report  in  two 
years time) 

87. 
assessed 

Not 

88. 

NA 

89. 
existent 

Not 

90. 
costs 

No  specific 

91. 
g (yes) 

Grandfatherin

92. 
assessed 

Not 

93. 

NA 

94. 

95. 

96. 

97. 

98. 
in the CRR 

Changes 

99. 

EBA 

100. 
for  deviating 
EBA 

Explanation 
from 

101. 
in MS 

Situation 

102. 
Comments 
on impacts for MS 

103. 
limits (soft) 

LTV 

104. 
approach 

Same 

105. 

NA 

106. 
of compliance 

High  level 

108. 
based 2%-5%) 

OC 

(risk 

112. 
Almost  all 
MS  have  some  OC 
requirements  today 
set 
different 
at 
levels.  

Same 

109. 
approach 
for 
application  of  OC 
to CRR compliant 
and 
only  CB 
method 
of 
calculation 
(nominal).  We 
deviate    for  the 
level:  5%  for  the 
EBA,  while  we 
chose a risk based 
approach  ranging 
between  2%  and 

111. 
A  risk  based 
approach 
makes 
sense to link the level 
of 
overcollateralisation 
to  the  level  of  risk  in 
the 
pool. 
cover 
Moreover,  for  some 
MS, 5% would be too 
high  (DK  and  DE  in 
particular),  while  for 
others  2%  would  be 
too low. 

111 

107. 
No 
significant  changes 
for  the  majority  of 
MS 

The 

113. 
risk 
based 
approach 
entails  lower  costs 
than 
5% 
the 
threshold  envisaged 
by the EBA for all. 

 
 
 
 
 
5%  The EBA left 
the  evaluation  of 
the  level  open  to 
further analysis. 

110. 

112 

 
 
 
 
Acceleration of a covered bond  

ANNEX 7 - GLOSSARY 

to 

bonds 

declared 

Covered 
be 
are 
immediately  due  and  payable,  thus  moving 
the payments to the bond holder to an earlier 
time than the original maturity date, typically 
due  to  default  of  the  issuer  and  subject  to 
strict demands.   

Asset encumbrance  

The percentage of assets on a bank’s balance 
sheet  pledged  or  otherwise  used  as  security, 
including, inter alia to covered bond holders. 

Bankruptcy remoteness of the covered bond   Meaning 

the  covered  bond  may  not 
automatically  accelerate  upon  the  issuer’s 
insolvency or resolution. 

BRRD 

Bullet structures 

CMU 

Competent authority  

2014/59/EU 

Directive 
a 
framework for the recovery and resolution of 
credit institutions and investment firms (Bank 
Recovery and Resolution Directive). 

establishing 

Covered  bonds  with  soft-bullet  structures 
provide  for  the  possibility  to  extend  the 
scheduled  maturity  for  a  certain  period  of 
time. Typically, this might be 12 months, but 
can  also  result  in  the  structure  becoming 
"pass-through"  under  specific  conditions 
(conditional pass-through/CPT), which means 
that  the  cash  flows  from  the  assets  in  the 
cover pool are passed directly to the covered 
bond  holders.  The  extension  triggers  may 
vary  and  can  be  defined  by  law,  at  the 
discretion  of  the  issuer  or  a  result  of  non-
payment on the scheduled maturity date.  

CMU is the Capital Markets Union, a plan of 
the European Commission to mobilise capital 
and establish a genuine single capital market 
in the EU.  

The  authority  vested  by the  national  covered 
bond  regime  with  the  function  of  exercising 
special  public  supervision  for  the  benefit  of 
the  covered  bond  investors.  The  competent 
authority is not necessarily the same authority 
as 
the  general 
prudential supervision of credit institutions. 

the  one  responsible  for 

Cover assets  

The assets eligible for serving as security in a 

113 

 
Covered bond programme  

Cover pool 

Cover pool monitor  

Coverage requirement  

CBPP 

cover pool  

Refers to the perimeter of claims and 
obligations as well as activities related to a 
specific covered bond product of the issuer, 
and to which protective measures of the 
respective covered bond regime would apply 
in the issuer’s insolvency. Different issuances 
(different International Securities 
Identification Numbers (ISINs)) of the same 
covered bond programme do not necessarily 
constitute separate covered bond 
programmes. The term ‘covered bond 
programme’ can also be referring to covered 
bond activities executed by specialised 
covered bond issuers in some jurisdictions, 
where a licencing procedure refers to covered 
bond activities rather than to covered bond 
programmes.  
The  pool  of  assets  that,  at  any  point  in  time, 
constitute the security for the covered bonds. 
They  must  be  segregated  from  other  assets 
owned  by  the  issuer  to  ensure  certainty  of 
bondholder claim. 

An internal or external entity other than the 
ordinary auditor of the covered bonds issuer, 
monitoring specific tasks of the issuance of 
covered bonds in going concern, e.g. 
verifying coverage tests or signing off 
inclusion and removal of cover assets in/from 
the cover pool  
Article  52(4)  of 
the  UCITS  Directive 
establishes the coverage principle of covered 
bonds requiring that, during the whole period 
of  the  bonds’  validity,  the  assets  underlying 
the  covered  bonds  must  be  capable  of 
covering  claims  attached  to  the  bonds.  The 
EBA  report  2016  recommends  coverage 
requirements 
to  be  part  of  a  common 
framework.  

The  Covered  Bond  Purchase  Programme,  a 
programme  originally  instituted  in  2009  by 
the  European  Central  Bank  to  support  a 
specific 
segment  by 
purchasing covered bonds. CBPP3 is the third 
and  latest  purchase  programme,  started  in 
October 2014. 

financial  market 

114 

 
CEE 

Central and Eastern European countries 

CPT/conditional pass through  

See "Bullet structures" 

CRR 

Dual recourse 

EBA report 2014 

EBA report 2016 

EBRD 

ECB 

ECBC 

EMIR 

EMS 

ESN 

Regulation  No  575/2013  on  prudential 
institutions  and 
requirements 
investment 
requirements 
regulation) 

for  credit 

(capital 

firms 

The  dual  recourse  secures  the  covered  bond 
investor  a  claim  on  both  the  cover  pool  and 
the issuer. 

EBA report on EU covered bond frameworks 
and capital treatment – 
Response to the Commission’s call for advice 
of  December  2013  related  to  Article  503  of 
the Regulation (EU) No 575/2013 and to the 
ESRB  Recommendation  E  on  the  funding  of 
credit 
institutions  of  December  2012 
(ESRB/12/2), published July 2014 
EBA 
– 
Recommendations  on  harmonisation  of 
covered  bond 
the  EU, 
frameworks 
published December 2016 

covered 

report 

bonds 

on 

in 

European  Bank 
Development 

for  Reconstruction  and 

European Central Bank  

European Covered  Bond Council, created by 
the European Mortgage Federation (EMF) in 
2004 to represent and promote the interests of 
covered  bond  market  participants  at  the 
international level.  

Regulation  (EU)  No  648/2012  on  OTC 
derivatives,  central  counterparties  and  trade 
repositories (European Markets Infrastructure 
Regulations). 

Extendible  Maturity  Structures  (see  bullet 
structures) 

European Secured Notes is as a dual-recourse 
financial  instrument  on  an  issuer's  balance 
sheet 
structural 
the 
characteristics  of  covered  bonds  to  two  non-
traditional  cover  pool  assets  -  SME  bank 
loans and infrastructure bank loans. ESNs are 

applying 

basic 

115 

 
EP report  

HTT/Harmonised Transparency Template 

LTV  

LCR  

LCR Delegated Act 

Overcollateralisation/OC 

Segregation of cover assets    

SME 

Soft bullet 

Solvency II 

the  EP 

originally suggested by the ECBC, supported 
in 
report  and  currently  being 
examined  by  the  Commission  to  assess  the 
case for legislative action.  

Report from the Committee on Economic and 
Monetary  Affairs:  Towards  a  pan-European 
covered  bonds  framework,  adopted  in  June 
2017 

Template introduced by ECBC. Standardised, 
Excel-based form that issuers who have been 
granted  the  Covered  Bond  Label  by  ECBC 
use  to  disclose  information  on  their  covered 
bond programs. 

Loan-to-value.  The  ratio  between  the  loan 
and 
the  asset  serving  as 
collateral.  

the  value  of 

The  liquidity  coverage  ratio  (LCR)  refers  to 
the  demands  for  highly  liquid  assets  to  be 
held  by  financial  institutions  to  meet  short-
term obligations. 

Commission  Delegated  Regulation 
(EU) 
2015/61  to  supplement  Regulation  (EU)  No 
575/2013  with  regard  to  liquidity  coverage 
requirement for Credit Institutions 

The level of collateral exceeding the coverage 
requirement.  Can  be  statutory  or  contractual 
(used to support the credit rating treatment of 
the bonds).  

and 

legally 

binding 

The 
enforceable 
arrangements  establishing  the  existence  and 
maintenance  of  a  cover  register  and/or  the 
transfer of the cover assets to a legally remote 
vehicle  (an  SPV)  to  ensure  investors'  access 
to the cover assets. 

Small and Medium (sized) Enterprises 

See "Bullet structures"  

Directive  2009/138/EC  on  the  taking-up  and 
pursuit  of  the  business  of  Insurance  and 
Reinsurance 

116 

 
Special public supervision  

Substitute cover assets  

UCITS   

A  requirement  in  UCITS  article  52  (4) 
demanding  for  the  issuer  of  the  covered 
bonds to be "subject by law to special public 
supervision  designed 
to  protect  bond-
holders". The demands for the supervision are 
not further defined in UCITS.   

Assets  held  in  addition  to  the  primary  assets 
in  the  cover  pool,  typically  represented  by 
derivatives and other assets held for liquidity 
purposes. 

Directive  2009/65/EC  on  the  coordination  of 
administrative 
laws, 
provisions 
for 
transferable 
collective 
securities  

regulations 
relating 
investment 

and 
to  undertakings 

in 

117