A new Regulation and Directive amending certain provisions of the Capital Requirements Regulation on covered bonds and introducing standards on the issuance of covered bonds and covered bond public supervision has been published in the Official Journal of the European Union. The Regulation and Directive will both enter into force on January 7, 2020. The Regulation will apply directly in all Member States from July 8, 2022, while Member States must publish national legislation implementing the Directive by July 8, 2021 and must apply that legislation from July 8, 2022.

“Covered bonds” are securities issued by financial institutions and backed by assets, meaning investors take some security against the risk of issuer default. The CRR provides for preferential treatment for covered bonds that fulfill certain conditions. The new Regulation makes certain amendments to the CRR to strengthen the quality of the covered bonds eligible for favorable capital treatment, including by:

• Eliminating the use of structures that include residential or commercial mortgage-backed securities in the cover pool of assets, as the use of such structures is decreasing and may add unnecessary complexity; and
• Requiring that covered bonds that benefit from preferential treatment must be subject to a minimum overcollateralization level of at least 2%, which exceeds the coverage requirements under the Directive.

The new Directive aims to harmonize the regulation and treatment of covered bonds across EU Member States. It does this by:

• Setting out a definition of “covered bond” that covers debt obligations issued by credit institutions in accordance with the national transposition of the Directive and that are secured by cover assets to which covered bond investors have direct recourse as preferred creditors;
• Determining the structural features of covered bonds, which should include entitling covered bond investors to claims against the credit institution issuing the bonds and priority claims against the principal and interest upon the insolvency of the covered bond issuer;
• Setting parameters for eligible cover assets and coverage and liquidity requirements;
• Imposing transparency requirements for credit institutions to provide information on their covered bond programs to allow investors to assess the profile and risks of the program; and
• Requiring Member States to establish public supervision of covered bonds, including to grant relevant authorities the power to impose administrative and, optionally, criminal penalties for breaches of the covered bond rules.

View the Regulation.

View the Directive. 

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