EBA report on favorable capital treatment

On July 1, 2014, the European Banking Authority published a favorable opinion on the preferential capital treatment of covered bonds.  The EBA also delivered a companion report entitled EBA Report on EU Covered Bond Frameworks and Capital Treatment.  See also the press release from the EBA.  The EBA concluded that the favorable capital treatment under the capital requirements regulation (CRR) for bank investments in covered bonds was appropriate, but called for some “further qualifying criteria for their preferential treatment.”  The EBA recommended against the use of aircraft liens, residential mortgage backed securities (RMBS) and commercial mortgage backed securities (CMBS) as cover pool assets after December 2017.  The opinion and the report were delivered to the European Commission in response to a request for advice.

With respect to favorable capital treatment the EBA said:

“Due to the good historical default/loss performance of covered bonds in the EU, the dual recourse principle embedded in covered bond frameworks whereby the covered bond holder has a claim on the issuing institution and a priority claim on the cover assets, the special public supervision for the protection of the bondholders mandated by the UCITS Directive and the existence of qualifying criteria in Article 129 of the CRR, the EBA considers the preferential risk weight treatment laid down in Article 129 of the CRR to be, in principle, an appropriate prudential treatment. “

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