COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE 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 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

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   EUROPEAN COMMISSION  Brussels, 12.3.2018  SWD(2018) 51 final  COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE 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 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) 50 final}  
 
 
Impact assessment on a proposal for Initiative on an integrated covered bond framework 

Executive Summary Sheet 

A. Need for action 

Why? What is the problem being addressed?  
Investment and job creation are key objectives of the EU. As part of the Capital Markets Union (CMU), the 
EU  has  launched  several  initiatives  to  unlock  funding  of  Europe's  growth  and  stimulate  market  financing. 
Covered  bonds  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 bond markets are unevenly developed across the Single Market. They are very large in 
some  Member  States,  less  so  in  others.  Whereas  covered  bonds  benefit  from  a  preferential  prudential 
treatment in light of their lower risks, what constitutes a covered bond is only partially defined in EU law.  

What is this initiative expected to achieve?  
The initiative will firstly aim at leveraging the capacity of financial actors to invest in the wider economy by 
facilitating  the  use  of  covered  bonds  by  credit  institutions.  It  will  seek  to  foster  covered  bond  markets  in 
Member States where they do not currently exist or are under-developed as a means to help financing the 
real economy in line with the objectives of the CMU. It will also seek to diversify the investor base (today 
most  covered  bonds  are  purchased  by  banks);  further  stimulate  investments  within  the  EU;  and,  attract 
more investors from third countries. 

Secondly,  it  will  address  prudential  concerns  deriving  from  the  current  lack  of  a  sufficiently  complete 
definition  in  EU  law  of  the  key  features  of  what  constitute  a  covered  bond.  An  increased  level  of 
harmonisation of those features should ensure that the preferential treatment contained in several pieces of 
EU  law  is  granted  to  covered  bonds  sharing  a  minimum  amount  of  common  key  characteristics  ensuring 
prudential  soundness  and  a  high  level  of  investor  protection.  The  initiative  will  also  include  targeted 
amendments to the requirements under which preferential capital treatment is granted to credit institutions 
investing in covered bonds under the Capital Requirement Regulation. 

What is the value added of action at the EU level?  
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.  

Second, as regards prudential concerns, these stem from the fact that what constitutes a covered bond is 
not comprehensively addressed in EU law. EU action further defining what is a covered bond is necessary 
to ensure that the current preferential treatment granted by existing EU law is prudentially sound. 

Such action should nevertheless preserve well-functioning existing markets and limit itself to what is strictly 
necessary to produce a common definition of the key characteristics of a covered bond.    

B. Solutions 

What  legislative  and  non-legislative  policy  options  have  been  considered?  Is  there  a  preferred 
choice or not? Why?  
The Commission has considered a number of policy options that achieve the above objectives to a different 
extent. The baseline scenario consists of the current status quo (i.e. no action). There are also 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. 

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The preferred option is minimum harmonisation based on national regimes. Option 2 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  being  the  course  of  action  that  enjoys  the 
highest support by stakeholders.  

Who supports which option?  
Stakeholders  mostly  support  Option  2.  That  includes  institutional  investors,  supervisors,  Member  States 
and  covered  bonds  industry  representatives.  The  EBA  (report  2016),  the  ECB,  the  European  Parliament 
(July  2017  Report),  national  and  European  supervisors  have  advocated  for  initiatives  of  a  largely  similar 
nature  and  content.  A  majority  of  Member  States  also  favour  this  option,  including  those  representing  all 
largest  markets.  The  European  Covered  Bond  Council  representing  the  industry  is  also  in  favour  of  this 
option.   

C. Impacts of the preferred option 

What are the benefits of the preferred option?  
Implementing this option would stimulate the development of covered bond markets where they do not exist 
or are underdeveloped, increasing issuance between 50% and 75% of the benchmark of EUR342 billion. It 
would also lower costs of funding for issuers. At aggregate level funding cost savings of between 50% and 
75%  of  the  benchmark  of  EUR2.2-2.7  billion  per  year  would  be  achieved.  It  would  contribute  to  diversify 
investor  base  (60%  of  investors  other  than  banks),  to  facilitate  cross-border  investments  and  to  attract 
investors  from third countries (16.5% of investments from third countries  for  additional EUR 80 billion per 
year from outside the EU). Overall it would help achieving savings in borrowing costs for the real economy 
of  between  50%  and  75%  of  the  benchmark  of  EUR1.5-1.9  billion  per  year.  This  option  would  address 
prudential concerns, also in relation to market innovation, and achieve the prudential benefit of aligning the 
structural  characteristics  of  the  product  with  the  preferential  prudential  treatment  at  EU  level.  Finally,  it 
would also strengthen investor protection and reduce due diligence costs for investors.  

What are the costs of the preferred option?                                       
The  preferred  option  achieves  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.  The  direct  administrative  costs  both  one-off  and  recurrent  under  the  preferred 
option  are  expected  to  increase  for  issuers  in  low-cost  jurisdictions.  Costs  would  also  increase  for 
supervisors  and  in  particular  for  light-touch  jurisdictions  which  are  expected  to  converge  towards  the 
benchmark represented by high-cost jurisdictions. On the contrary costs will not increase for investors. The 
credit enhancing features of rules foreseen would lower due diligence costs for investors. 

How will businesses, SMEs and micro-enterprises be affected?  
The policy option chosen would have some direct and indirect positive effects on SMEs financing. 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. 

Will there be significant impacts on national budgets and administrations?  
No 

Will there be other significant impacts?  
No 

D. Follow up 

When will the policy be reviewed?  
A first review of the new framework could be undertaken 2-3 years after its entry into force. 

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