The European Commission aiming to create an overarching framework to coordinate an easier covered bond market within the EU, has published a new Directive 2019/2162/EU (hereinafter the “Directive”).
What are the Covered Bonds?
Covered bonds are debt instruments that are issued by a Financial Institution and secured by a pool of assets (“bond cover collateral”). Covered bonds have been established as one the most resilient asset classes in Europe and illustrate a long-term funding for banking functions.
What is the purpose?
The purpose of the Covered Bonds Directive is to harmonize the conditions and standards on the issuance of covered bonds, which actually are financing tools issued by financial institutions as securities against the risk of an event of default, in accordance with the national transposition of the Directive. The issuers of those EU covered bonds will need to be sure that they comply with the requirements of the Directive.
The Directive, also, sets out certain tasks and supervisory responsibilities to follow up by the national regulators, including dual recourse and bankruptcy remoteness, as well as prohibitions for non-compliance. It also defines a common designation to obtain an EU covered bond label and benefit from preferential capital management.
Nevertheless, the Directive aims to harmonise certain aspects of national frameworks and smoothen the well-functioning of covered bonds in the Union. Apart from limiting risks, vulnerability and financial instability, the Directive constitutes a common goal for all the Member States to adopt a national covered bonds framework.
How the benefit of the covered bond can be used?
The covered bonds are necessary financing tools in situations of financial market instability. In such cases the financial institutions finance themselves via covered bonds to obtain liquidity, which indirectly benefits the society.
It also benefits the investor offering him a stable return at low risk.
What are some changes that are introduced by the Directive?
- Enlarge the composition of the security package.
- Increases control and supervision.
- Magnified the protection of the investors
When those changes enter into force?
The Member States must publish national legislation implementing the Directive by July 8, 2021 and must apply that legislation from July 8, 2022.
