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Finally, a directive. Don’t be ungrateful

26 March 2018
Richard Kemmish

You are a cynical audience, my covered bond friends. The publication by the European Commission this week of the covered bond directive has been greeted by more scepticism than it deserves.

The ire seems to have been focussed mainly on the granting of too much discretion to member states with regard to asset definition and (to a lesser extent) over-collateralisation. It has not given sufficient credit to the successful completion of the task that Commission has set itself based on what the market told it to do. 


Winding back to the start of the process – Commission’s public consultation on covered bonds in 2015 – the overwhelming message from the market was two-fold: ‘it ain’t broke, so don’t fix it’ and ‘leave it up to member states to define their own covered bonds, the market will judge’. The first of those was never an option – it ain’t broke but we did need to upgrade it to reflect the new regulatory environment, in particular the higher probability that a covered bond mechanism would actually be tested in practice given the new state aid rules and the resolution directive.


The second message was the interesting one. Attempts to impose a 29th regime were never going to work – as the market said. A total free for all was never going to work – as the market reluctantly realised but would never actually say. Somewhere in-between those two extremes though we have an answer which achieves a minimum standard for covered bonds and a degree of harmonisation but that doesn’t mess up national specificities.


Looking at the comments on the directive currently clogging up my in-box (please stop sending them) their focus is specific, rather than general. Sometimes this is explicit, sometimes implied but always underlying the negative comments is the thought: ‘I do not want country X to be able to do this’. Many have said that too much latitude has been granted to member states.


I don’t think that it is necessarily contrary to the spirit of harmonisation and minimum standards to say that this is where market judgement comes in.


You may or may not want to have covered bonds backed by ships in your cover pool. You may or may not want to have Spanish covered bonds in your cover pool. That is up to you. This is what I mean when I say that the criticism is specific.


What Commission have done here is to say that your covered bonds, whether they are backed by ships or Spanish mortgages are going to meet certain very well defined minimum credit standards. What Commission have not done is tell you which bonds to buy.  


That is your job. And it is easier now because of this directive.

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