Covered bonds and covered bond public supervision

KEY POINTS

Directive (EU) 2019/2162

Scope

The directive covers the following.

Structural features.

• Dual recourse. Investors have preferential rights and are entitled to double protection (known as dual recourse) through claims against both the institution issuing the bonds and the cover assets in the case of the insolvency or resolution of this institution.
• Cover assets. Covered bonds are secured at all times by high-quality cover assets – typically mortgages or government debt securities – or other items specified in Article 6(1) of Directive (EU) 2019/2162.
• These cover assets must meet specific requirements in Article 129(1) of the CRR, or they must meet certain specific requirements for high quality as specified in Directive (EU) 2019/2162 (the covered bonds directive), such as:
  • generally accepted valuation standards for physical assets, which should be monitored and adequately insured;
  • ongoing public supervision of the counterparty’s operational soundness and financial solvability where assets are in the form of exposures;
  • risk diversification rules for assets that are not eligible pursuant to Article 129(1) of the CRR, etc.
• Specific rules apply in case of intragroup pooling and joint funding.
• Transparency. Credit institutions must provide sufficiently detailed information on their covered bond programmes (at the portfolio level, not at the loan level) in order to enable investors to assess the profile and risks of these programmes and carry out due diligence. This information should be available on the institution’s website, supplied at least quarterly and, as a minimum, should include the following:
  • the value of the cover pool and outstanding covered bonds;
  • a list of the International Securities Identification Numbers for all covered bonds issued under the relevant programme;
  • the geographical distribution and type of cover assets, their loan size and valuation method;
  • details of market, interest rate, currency, credit and liquidity risks;
  • the maturity structure of cover assets and covered bonds;
  • the levels of required and available coverage and of statutory, contractual and voluntary over-collateralisation (the level of collateral that exceeds the required coverage);
  • the percentage of loans where a default is considered to have occurred and where the loans are more than 90 days overdue.
• Liquidity buffer. Cover pools must always include a buffer of liquid assets (available or readily convertible into cash) to cover the maximum cumulative net liquidity outflow over the next 180 days.
• Covered bonds with extendable maturity structures. These are covered bonds whose agreed end date may be extended. They may be allowed by EU Member States subject to certain conditions and must be notified to the European Banking Authority (EBA).

Covered bond public supervision.

• Covered bonds are subject to a special public supervision. EU governments appoint one or more competent authorities to monitor the issue of covered bonds in order to assess compliance with the legal requirements.
• Covered bond programmes are subject to a permission that should be obtained before issuing covered bonds under the relevant programme. To receive this, credit institutions must have:
  • an adequate operational programme for issuing covered bonds;
  • adequate policies, processes and methodologies for approving, amending, renewing and refinancing loans included in the cover pool;
  • dedicated and suitably qualified management and staff.
• In the event of the insolvency or restructuring of a credit institution, the competent authorities cooperate with the resolution authority handling the case to ensure the rights and interests of covered bond investors are preserved. Member States may provide for the appointment of a special administrator.
• Credit institutions must report the information specified in the directive to the competent authorities on a regular basis.
• Administrative penalties and other administrative measures apply for institutions that break the rules. These penalties and measures must be effective, proportionate and dissuasive. Member States may decide not to provide for administrative penalties or other administrative measures for breaches that are subject to criminal penalties under their national law.
• Competent authorities publish on their websites:
  • national laws, regulations, administrative rules, including penalties and other measures, and general guidance adopted in relation to the issue of covered bonds;
  • the list of credit institutions permitted to issue covered bonds.
• Covered bonds are entitled to use the label European Covered Bond (only for covered bonds that meet the requirements laid down in the provisions of national law transposing the directive) or European Covered Bond (Premium) (only for covered bonds that meet the requirements laid down in the provisions of national law transposing the directive plus the requirements of Article 129 of the CRR). The labels are voluntary, alongside national denominations.
• The directive makes small amendments to Directives 2009/65/EC (see summary) and 2014/59/EU (see summary).
• Transitional measures apply to covered bonds issued before 8 July 2022.

• The European Commission, in close cooperation with the European Banking Authority:
  • was to provide the European Parliament and the Council of the European Union, by 8 July 2024, with a report and, if appropriate, a legislative proposal on whether – and, if so, how – an equivalence regime could be introduced for non-EU country credit institutions issuing covered bonds and for investors in those covered bonds;
  • must provide the European Parliament and the Council, by 8 July 2025, with a report on the implementation of the directive with regard to the level of investor protection and on the developments regarding the issue of covered bonds in the EU.
• Amending Directive (EU) 2023/2864 inserts an article in Directive (EU) 2019/2162 requiring Member States, from 10 January 2030, to ensure that, when making public any regulated information to investors, credit institutions permitted to issue covered bonds submit that information at the same time to the collection body and notify the European Securities and Markets Authority thereof for the purposes of making it accessible on the European single access point, set up under Regulation (EU) 2023/2859.

Regulation (EU) 2019/2160

• The regulation complements Directive (EU) 2019/2162 and builds upon the current supervisory treatment of covered bonds under the CRR.
• It adds requirements for cover assets, including a requirement for minimum over-collateralisation³ and substitute assets⁴, thereby strengthening the quality of the covered bonds eligible for preferential capital treatment.
• It seeks to do so by:
  • specifying which types of cover assets can be included in the covered bonds to be eligible for the preferential capital treatment, and under what conditions;
  • eliminating the use as eligible assets of structures that include in the cover pool residential or commercial mortgage-backed securities, as the use of those structures is decreasing and is considered to add unnecessary complexity to covered bond programmes; and
  • requiring at least 5 % over-collateralisation for covered bonds to qualify for preferential capital treatment, or 2 % if the valuation of the property is based on mortgage lending value (this over-collateralisation level may be on a statutory, contractual or voluntary basis).