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Thoughts from Barcelona: Commission’s keynote

At the Euromoney Covered Bond Conference in Barcelona last month the thoughts of many delegates were running ahead to Q1 next year and the publication of the first ever Covered Bond Directive.

Listening to Didier’s speech again a few thoughts occurred to me.

The market has said ‘if it aint’ broke don’t fix it’ so often and so loudly that Commission still feels the need to justify taking action here. They do this, quite rightly in my view, by emphasising the ‘can we do more?’ rationale for action. ‘Can we do more’ breaks down into other asset classes – which fall into a separate debate on ESNs – and other countries, in particular those where covered bond funding has more potential to add value to society. I concur.

Two other justifications for legislative action, fixing faults and justifying prudential treatment got much less emphasis in the speech than they had in previous public comments by Commission – re-reading the public consultation from two years ago you can see the shift in emphasis. Commission gets it, why then do so many of us in covered bond land keep objecting to legislation on the grounds that it is unnecessary?

Another way in which it became clear from Mr Millerot’s speech that he had listened to industry was the very fact that we were talking about a covered bond directive, not a covered bond regulation. For sure some of the new stuff will come in a regulation but the Commission wants to emphasise that this will be narrow, technical and very focussed – essentially regulation only to change existing regulations with references to covered bonds.

A principled approach
The heavy lifting is going to be done by Directive. Why does this matter? Because this is how Commission can ensure that the balance between principles and details is tipped the ‘right’ way. The more closely you look at national specificities in covered bond markets, the more you realise that principles are the only workable way to do this.
Some people have tried to push that balance the other way, detailed rules instead of principles. I don’t care that much when that comes down as “thou shalt publish pool reports quarterly” rather than “thou shalt publish pool reports sufficiently frequently for investors to be cool with it”. I do care when it is “thou shalt calculate over-collateralisation like this” rather than “you decide how to calculate your own over-collateralisation”.

My final observation (for now, I reserve the right to have an opinion in the future) is a slight concern about timing. We’ve all been thinking about this for a couple of years now. Q1 next year feels like an “aspirational target” rather than something you’d actually want to tell your boss. The fact that Mr Juncker has publicly announced that it is going to happen then, concerns me. I hope I am wrong.

For the details, I highly recommend that you listen to the recording, available here. But for the general direction of the process I feel reassured.


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