Capital Markets Union and the 29th regime: The Covered Bond Blog

18 Feb 2015 | Richard Kemmish

Call me naïve but I assumed that the 29th covered bond regime was like one of the Grimm Brother’s fairy tales. Not to be taken as a literal event but as an allegorical warning to make sure that small children don’t stray too far into the forest. Or in our case don’t withhold structural details and cover pool details that investors need to know.

Reading the Capital Markets Union green paper, or at least a samizdat version thereof, I learnt that the 29th regime isn’t just a threat in our village but – like all good fairy tales – it is used everywhere to keep children in line.  It’s hanging over the pensions industry too apparently. 

Why is it so threatening?

A ‘take it or leave it’ brand new covered bond law that is designed to work in any EU jurisdiction sounds innocuous enough. It appeals to the Darwinist in me, if it isn’t any good it won’t get used. As you were.

Except that isn’t the way Brussels works. “The new regime is entirely voluntary until....”, or “Preferential treatment of covered bonds will only apply to regime 29 from...” is more in keeping with Commission’s preferred approach. No matter that the banking industry points out that the 29th regime doesn’t actually work. Some in Brussels seem to wear opposition from the banking industry as a badge of honour.

Can a 29th regime work? If it is anything like the other 28*, obviously not. I’ve said it before (and no doubt will say it again), covered bond laws touch on some of the oldest laws on the statute books in any country, they are tailored to meet fundamental differences in the economics of society and simply need to differ.

I read with amusement the other day an article by an excited American journalist about how Spaniards are about to embrace US style 30-year fixed rate, prepayable mortgages. No. Wrong. As wrong as every journalist and politician that I’ve come across in the last twenty years who thinks that mortgage culture a country can change overnight because a politician thinks it’s a good idea.

Given 28 fundamentally different starting points, how might a 29th regime actually work? The only way that I can see is by defining the destination, not the route. Meet these qualitative criteria and you get the preferential treatment you seek. Up to national legislatures to work out how.

Note: qualitative, not quantative. How much over-collateralisation do you need? “X%”, does not work – the person who drafted the eligibility criteria for liquidity cover assets and I must agree to differ on this.

For me the best attempt at this so far is the paper released last year by the EBA on (inter alia) minimum supervisory standards.  Not perfect, perhaps, but far less scary than a big bad wolf in the European Commission.
*OK, I know there aren’t 28 covered bond regimes in the EU, some have none, some have two but just trying to keep it consistent.

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