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Dull is good

28 March 2018
Richard Kemmish

Of the 36 articles in the combined covered bond directive and regulation, about 10 of them are technical and dull, two or three are relatively new and/or controversial – and have therefore attracted all of the press commentary so far. But the vast majority (I make it 23) of the articles have attracted almost no commentary. Which is a huge pity because these are the most useful for investors and well, to be honest, me.

Why do I say this? Well the controversial bits, such as whether the EU or member states should have discretion over over-collateralisation standards or asset eligibility definitions, we can (ok, will) argue about for years to come. There are no right or wrong answers, opinions are mainly based on preconceptions of what ‘covered bond’ means. That won’t stop us discussing it late into the night in bars in downtown Frankfurt (oh, the glamour!).


The good bits though are the dull bits. The bits that define what dual recourse means, what the standards for derivative contracts are, what member states must do before granting an issuer license, etc.  Given how important these details are to the overall creditworthiness and practical application of covered bonds, it is slightly odd that it has never been put into EU law before now.


The seed of these paragraphs was the ‘best practice’ principles laid down by the European Banking Authority in 2014. It’s a testament to just how good these principles were that they are incredibly close to the substance that is now in the draft directive.


It is also to the EBA’s credit that even before the draft directive was published they have been the basis for national upgrades of covered bond laws. They would have been the basis of even more upgrades if it wasn’t for member states waiting to see if the principles became rules. They have; no more excuses to delay.


But if the principles, and the directive articles that flow from them, are quite useful to improve already quite good covered bond laws, they are even more useful where there isn’t a covered bond law. Before EU regulations said anything substantial about covered bonds, what was a covered bond-less country to do if it wanted to create a market?  


The typical answer would be to review all of the existing covered bond laws in Europe and pick and choose which bits seem most appropriate. The choice being heavily biased towards picking more details from the well-established covered bond markets. Which is a pity because often the established covered bond markets were based on very different financial systems to those prevailing in the new country.


Now we have a better guide. New countries will still look to existing markets for guidance. But in my day to day work in new jurisdictions the new directive will be a guide to what must be done. The fact that it is principle based, rather than unduly explicit, means that the new covered bond law will be better able to address national specificities. 

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