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Don't just sit there: do something

23 October 2015
Richard Kemmish

Assuming that the natural inclination of regulators is to do something, rather than to do nothing, what are the possible outcomes from the European Commission’s covered bond consultation other than the ‘do least’ outcome that I mentioned in my previous post?

There are basically three. In ascending order of disruption:

Commission could publish a covered bond directive, I know that doesn’t sound particularly ‘undisruptive’ but bear with me. A directive is not a regulation, it does not apply automatically, it must be transposed into national law.

A directive can vary from a set of definitions of broad principles that the law should aim for to a very explicit definition of what the national level legislation should cover. Probably Commission would realise that the broad principles approach is the right one here. The fact that they feel an urge to congratulate themselves about the success of the UCITS definition of covered bonds, which was nothing if not broad principle, suggests that they will be quite pragmatic.

The sort of high level principles that such a directive should cover are clear enough and not vastly more than the EBA best practice guidelines (thou shalt ensure asset segregation in insolvency) plus existing buy-side regulations (thou shalt publish LTV ratios semi-annualy).  How to interpret those nice ideals into Portuguese or Finnish law is best left to the Portuguese or Finnish parliaments.

Option 2 on Commission’s menu is a 29th regime (dumb name, has to change every time someone joins the union). This simply won’t work if it is voluntary – does Commission honestly think that a pfandbrief issuer will abandon German law and regulation to adopt something designed in Brussels? Or an issuer from any country other than those few who have really messed up their covered bond law?
The consultation paper seems to think that the only down side of this is that the market will become more fragmented as issuers slowly adopt their programmes to this wonderful new model. I’m sorry but I have to say it: that is just naive.

The problem with any 29th regime proposal is that, as a voluntary approach is seen to fail it transitions into a compulsory approach – no doubt with a phase in period and grandfathering rules. The only (not to be discounted) upside I see with such an approach is that it generates plenty of work for covered bond consultants. Fingers crossed then. 

Option 3 is a covered bond regulation: a directly applicable set of covered bond laws that apply without being transposed into national legislation. Essentially this is what the 29th regime would be doomed to become and, as such they share one fundamental problem: they won’t work, for reasons that I’ve repeated far too many times about national specificities.

So which is it to be? ‘Do least’, a directive (that amounts to almost the same), or a 29th regime / covered bond regulation which together also amount to more or less the same.

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