Pfandbrief banks welcome in principle the EU’s drive to create a common legal framework for covered bonds, and call for uniform minimum standards at a high level

- vdp rejects the idea of creating a separate European legal framework (“29th regime”)
- Chief Executive Jens Tolckmitt: clearly in favor of minimum standards at a high level in order to prevent interference in successful national regimes

 The Association of German Pfandbrief Banks (vdp) welcomes in principle the thoughts published today by the European Commission on creating a uniform legal framework for covered bonds. Of the options presented in the Commission’s consultation paper for such a common legal framework, the vdp is clearly in favor of adopting a flexible approach based either on high market standards (“best practice principles”) or on a directive providing for binding minimum harmonization. Compared with the establishment of a so-called “29th regime”, which is to say the creation of a new unified product at the European level with a separate legal framework, the vdp believes that minimum harmonization offers considerably more advantages.

Jens Tolckmitt, Chief Executive of the vdp, explained: “A European legal framework certainly offers a chance to make the covered bond product even better across national borders. In the Pfandbrief banks’ view, the only feasible route is to set minimum standards at a high level. This is because, by gradually leading the national rules towards a common standard of quality at the European level, clear qualitative improvements to the general conditions for covered bond markets in the EU could be achieved. At the same time, this could prevent systemically incompatible interference in existing national regimes, some of which are in fact functioning very well. By contrast, full harmonization at the European level could cause the market more harm than good.”

“29th regime” not feasible in pure form

The European Commission believes that a common legal framework for the covered bond markets, which would represent a further building block in establishing the capital markets union, would generate a positive impetus for economic development in Europe. The Commission is proposing specific alternatives: either “voluntary convergence” in line with a recommendation by the European Commission which would be implemented by the EU member states on the basis of market standards drawn up by the European Banking Authority (EBA), or legally anchored harmonization in the form of a directive or a so-called “29th regime”, in which case separate regulatory treatment would apply. The latter alternative would be the basis for creating a separate European covered bond which would have a legal framework of its own alongside the 28 national regimes already in place.

The vdp does not consider such a “29th regime” to be feasible in pure form, above all because key legal areas such as insolvency law have not been harmonized at the European level. The Association explains its support for the convergence, at a high level, of national covered bond systems based on minimum standards by arguing that it would improve the comparability of different products. In particular, such a measure would trigger competition among the existing systems and spark the need in many EU countries to strengthen their national covered bond laws – with the result that the quality would be improved across the entire covered bond market.

However, in the event that the consultation and decision-making process now underway does lead to the introduction of a “29th regime”, the vdp demands, at the very least, that such a regime and the existing national covered bond systems receive equal regulatory treatment. In the Association’s opinion, there must be no regulatory incentives which give preference to a new European product. Moreover, the vdp opposes the idea put up for discussion by the European Commission, namely that the range of assets eligible as cover be extended, on the grounds that this would in effect water down the quality of the covered bond product.

The vdp will now prepare detailed comments on the consultation paper presented today by the Commission, and expects to publish them in early December. 

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