EU – Baltic States, Financial Services, Investments, Legislation, Markets and Companies

As part of the increased financing opportunities, the EU suggested to revive securitisation markets, in order to free up bank lending to the wider economy. That is done in order to support longer-term investment in infrastructure.

Besides, the Commission is working on measures to encourage venture capital, as well as reviewing the legislation that was put in place in response to the crisis, to check whether, taken in the round, it's working as intended.

After the call for evidence has ended, the Commission is going through the hundreds of detailed pieces of evidences received.

Covered bonds’ history

Covered bonds originated in the European bond market as a kind of securities created from public sector loans or mortgage loans where the security is backed by a separate group of loans. Covered bonds typically carry a 2-10 year maturity rate and enjoy relatively high credit ratings, depending on the quality of the pool of loans ("cover pool") backing the bond.

Covered bonds are often attractive to investors looking for high-quality instruments that offer attractive yields. They provide an efficient, lower-cost way for lenders to expand their business rather than issuing unsecured debt instruments.

More on cover bonds: Covered Bond Definition | Investopedia and  http://www.investopedia.com/terms/c/coveredbond.asp#ixzz3z0JhvIfg

As of 2009, 24 European countries allow covered bond instruments to be originated and sold; each country has rules in place governing the investment. The EU created guidelines for covered bond transactions in 1988 that allowed investors to invest more of their assets in covered bonds over previous limits. The U.S. entered the covered bond market in 2006 but the financial services sector meltdown of 2007-2009 slowed the market's potential growth.
http://www.investopedia.com/terms/c/coveredbond.asp

Harmonisation’s needed

Recent conference on covered bonds (DG FISMA Conference on Covered Bonds (Brussels, 1 February 2016), discussed pros and cons in covered bonds as well as revealing best practices. The aim was to see how the member state can attract more investors and overcome the barriers to investment across European states’ borders.

The Commission has collected views from covered bond issuers and investors, as well as rating agencies, supervisors, and governments, which will help to determine the EU approach to strengthening bonds market in Europe.

In the European Central Bank’s response to Commission’s proposal on covered bonds harmonisation has been quite positive. The ECB sees considerable benefits in such harminisation, in particular concerning minimum standards for the bonds.  

http://www.coveredbondnews.com/Article/3525166/Covered-bond-harmonisation-should-be-ambitious-says-ECB.html

Covered bonds’ role in economy

The European covered bond market is a vibrant one: it plays an important role in the member states’ economy and in the EU’s long term financing. The bond market is supported by a solid investor base, and in recent years, it's provided a reliable source of funding to banks and other lenders when the appetite for other types of debt dried up.

Covered bond issuance has grown steadily. In 2014, outstanding EU covered bonds exceeded € 2, 5 trillion, with the lion’s share of the global market made up by seven member states.

In many countries, covered bonds underpin the housing market. They provide the funding for 20% of mortgages in Europe. For example, in Denmark, mortgages are almost exclusively funded in this way. The commercial and residential real estate sectors of a number of other member states (including Germany, France and Spain) are heavily dependent on covered bonds.

Large public infrastructure projects have also often relied on this source of financing.

Covered bonds’ problems

But although Europe's covered bond market is strong, the crisis raised some questions. For example, the cost of covered bonds started to vary significantly between different member states. As housing bubbles burst, the value of the underlying assets – the bricks and mortar used as collateral – declined. And as markets readjusted their assessment of sovereign risk across Europe, they also changed their assessment of risk in the covered bond markets.

Overcoming the barriers to the free flow of capital and improving funding options for businesses in EU member states is in the heart of the European Capital Markets Union, CMU.

Commission’s consultations are done in order to understand the causes of this market fragmentation, and to see whether anything positive could be introduced.

The Commission is of the opinion that was sensible to act on the European Banking Authority's recommendation that further convergence of national covered bond frameworks would be beneficial while building on best practices.

Recommendations from consultation

Most respondents thought the greatest cause of market fragmentation was not the difference between national covered bond frameworks. For them, this had more to do with a decline in property values and mortgage markets, and the sovereign debt crisis. Many thought this made some market fragmentation inevitable.

Respondents have also emphasised that national frameworks for covered bond markets are largely working well. Tight legislative and supervisory frameworks play a valuable role in maintaining covered bonds as attractive, low risk and liquid investments. Bond holders enjoy dual recourse, meaning they can claim against the lender, and in case of insolvency, directly against the collateral as preferential creditors. Securities supervisors keep a close eye on collateral pools and make sure the requirements for collateral continue to be met and that assets are always greater than liabilities.

However, Commission’s aim is not for covered bond prices to be the same across Europe or to have one harmonised framework; it rather wants to build on national covered bond markets that work well. To see whether the experience, expertise and best practice that countries like Germany, Denmark or France have built up over the years, can be used to create a more integrated market.

In particular, Commissioner Jonathan Hill wants to see whether there are unnecessary legal barriers or differences that stand in the way of investment in covered bonds across Europe.

The diversity of covered bond products that flows from the different national frameworks is something that is widely valued. There needs to be enough flexibility in the system for new products to be developed in different markets.

Many responses also call for minimum quality standards or principles for covered bonds that could help improve both market discipline and efficiency, and to benchmark covered bonds more accurately between the EU states. The Commission wants to look into whether there is scope to build on what we have already without disrupting existing markets, and help investors compare products, assess risk and invest more outside their own country.

More consistent disclosure practices could help investors price covered bonds more accurately, on the basis of the issuer's financial strength and the quality of the cover pool.

The simplification and standardisation in market practices in Europe could help make covered bonds markets more liquid for all member states. It could also reduce the costs and the time currently needed to undertake separate analysis for the covered bonds of each Member State and their different legal frameworks – something that's particularly important for smaller investors.

In this way the Commission wants to proceed further work on covered bonds. In the coming weeks it will be looking in more detail at the responses received, deepening analysis, and seeking further advice before deciding whether action is needed, and what form that might take.

Reference: European Commission, speech by Commissioner Jonathan Hill at the DG FISMA Conference on Covered Bonds, Brussels, 1 February 2016, in: