ECBC Supports the Inclusion of Covered Bonds in LCR Level 1”


05 Dec 2013


Euro & Finance

Press release

The European Covered Bond Council (ECBC) supports the inclusion of covered bonds as Extremely High Liquid Assets (Level 1) under the definition of the Liquidity Coverage Ratio (LCR), in line with:
1. Recital 100 of the Capital Requirements Regulation (CRR): “When making a uniform definition of liquid assets at least government bonds, and covered bonds traded on transparent markets with an ongoing turnover would be expected to be considered assets of extremely high liquidity and
credit quality”.
2. The preliminary results of the extensive empirical study assessing the impact of the quantitative liquidity regulation and the uniform definitions of liquidity under Article 509 of the CRR undertaken by the European Banking Authority (EBA) and presented during the EBA public hearing on Liquidity Reports, which took place in London on the 23rd of October 2013.

These results show that the ranking of covered bonds for liquidity metrics is very similar to that of government bonds and that there is a clear differentiation with regards to other bond asset classes (corporate, ABS) and equities. While the EBA did not draw any conclusions in its study,
the ECBC believes the results suggest that covered bonds should qualify as Extremely High Liquid Assets (Level 1), under the definition of the LCR.

The EBA also stressed that “In covered bonds, variables capturing the existence of regulatory characteristics which reduce credit risk and enhance transparency are significant predictors of liquidity”.1

Furthermore, the ECBC is concerned about the inclusion of rating triggers in European legislation, which could cause unintended disruption to the level playing field that exists amongst European countries. Therefore, the ECBC invites the EBA and the European Commission to consider the work
undertaken by the covered bond industry to enhance the transparency and consistency of the asset class including, for example, the Covered Bond Label – aligned to Article 129 of the CRR as of the 1st of January 2014 – as an alternative means for identifying a qualitative segment of the covered
bond market, an alternative which is based on objective criteria in terms of transparency, credit quality and liquidity.

Finally, the ECBC would like to highlight that there is a positive rationale based on the empirical study undertaken by the EBA to include covered bonds in Level 1. The covered bond asset class has proved to be the most reliable source of wholesale funding through adverse market conditions
and has contributed to the financial stability of the European economy.

“The inclusion of covered bonds in Level 1 would mitigate against over reliance on sovereign debt by the European banking sector and would facilitate the objective of delinking the sovereign from the banking sector.”
Luca Bertalot, Head of the European Covered Bond Council

Luca Bertalot
Head of the ECBC
Tel: : +32 2 285 40 35

For further information on the activities of the European Covered Bond Council (ECBC) and the
European Mortgage Federation (EMF) please contact:
Avenue de Cortenbergh 71, B-1000 Brussels, Belgium
Tel. +32 2 285 40 30
Website: www.hypo.org
ECBC Covered Bond Comparative Database:
Notes to the Editor:
1. The European Covered Bond Council (ECBC) is a platform that brings together covered bond market participants including covered bond issuers, analysts, investment bankers, rating agencies and a wide range of interested stakeholders. The ECBC was created by the European Mortgage Federation (EMF) in 2004. As of December 2013, the Council has over 100 members across 25 active covered bond jurisdictions and many different market segments. ECBC members represent over 95% of covered bonds outstanding. For more information please visit the ECBC website,
2. Established in 1967, the European Mortgage Federation (EMF) is the voice of the European mortgage industry, representing the interests of mortgage lenders and covered bonds issuers at European level. The EMF provides data and information on European mortgage markets and its members grant more than 75% of residential and non-residential mortgage loans in Europe.
3. With over EUR 2.8 trillion outstanding at the end of 2012, covered bonds are playing an important role in European capital markets, contributing to the efficient allocation of capital and, ultimately, economic development and recovery. The EUR 707 billion issuance and the arrival of 20 new
issuers during 2012 evidence the ability of the asset class to provide essential access to long-term capital market funding. This is achieved even during volatile market conditions, notably thanks to a stable investor base. Their consistently strong performance and quality features attract the attention of regulators and market participants worldwide, which, in turn, leads to an increasing recognition of the macro-prudential value of the asset class.
4. From an issuer perspective, covered bonds provide an important contribution to the enhancement of a bank’s funding profile and the management of liquidity. Benefits provided by covered bonds include:

  • adding duration to liabilities, allowing banks to obtain long-term funding matching the maturity profile of their long-term asset portfolios;
  • providing stability to the funding mix, allowing ALM teams to increase predictability in the maturity profiles;
  • enabling issuers to increase diversification in the investor base, both in terms of geography and investor type; and
  • serving the Industry as one of the most reliable funding tools, even in times of turmoil.

5. Through the ECBC the European covered bond community has committed to develop a quality label for covered bonds. This initiative is intended to result in multiple benefits with an enhancement of the overall recognition of and trust in the asset class. The ECBC Covered Bond Label will facilitate access to relevant and comprehensive information for investors, regulators and other market participants. This initiative demonstrates the determination of the covered bond community to tackle the challenges arising from the crisis and underlines its active engagement in the maintenance of the high quality of the collateral assets, the improvement of transparency, and eventually, the promotion of liquidity and the
strengthening of secondary market activity. Further details on the initiative can be found here and here.

[1] See presentation made by the EBA on the 23rd of October 2013.