EU Makes Derogation for Own Funds Requirements for Certain Covered Bonds Permanent

A Commission Delegated Regulation amending the Capital Requirements Regulation has been published in the Official Journal of the European Union. Under CRR, for banks investing in covered bonds that meet certain criteria, a preferential risk weight is applied. The amending Regulation makes permanent the derogation previously available to national regulators to waive the own funds requirement for certain covered bonds. The CRR sets a transitional date of December 31, 2017 for the waiver to be available.

The amending Regulation follows the European Banking Authority's recommendations on the EU covered bond framework published in 2014 and the European Commission's subsequent report on capital requirements for covered bonds published in 2015.

Although the amending Regulation makes the derogation permanent, a recital indicates that the derogation may be revoked as the EU considers how to revise the EU covered bonds framework. The EBA published its recommendations on revising the framework in December 2016, recommending, among other things, the introduction of an EU covered bond directive which would apply across different financial sectors and be based on the minimum harmonization principle and the enhancement of the conditions set out in the CRR for preferential risk weight treatment of banks’ investments in covered bonds. This would include assessing the existing conditions on the eligibility of covered assets (which the EBA recommended should not be widened) and loan-to-value (LTV) limits for mortgage cover pools as well as establishing limits on substitution assets and a requirement on over collateralization.

The new waiver will apply from January 1, 2018.

View the amending Regulation.

View the EBA's 2016 recommendations.

View the Commission's Report.

View the EBA's 2014 Report.