This document provides recommendations on the review of the EU covered bond framework. It addresses topics such as the harmonization of cover assets, liquidity requirements, and transparency across national frameworks. The aim is to strengthen safeguards and disclosure while simplifying the existing regulatory framework.
This 198-page report, published in July 2025 by the European Banking Authority (EBA), responds to a request for advice from the European Commission dated July 2023. It concerns the review of the European regulatory framework for secured bonds (covered bonds). The scope covers legislative, technical, and market aspects of secured bonds within the European Union, focusing on the recent period up to the end of 2024. The document notably analyzes the transposition of the Covered Bond Directive (CBD) adopted in 2019, as well as its interaction with the Capital Requirements Regulation (CRR).
- Subject: The report analyzes the performance, functioning, and prospects of the European regulatory framework for secured bonds, in response to the European Commission's request.
- Importance: Secured bonds represent a key market in Europe, with approximately 2.5 trillion euros outstanding at the end of 2024, providing long-term, low-cost bank financing and playing a resilient financing role during crises.
- Main findings:
- The current framework, although harmonized by the 2019 CBD, leaves wide discretion to Member States, generating regulatory disparities and obstacles to market integration.
- The diversity of eligible assets within cover pools, notably the possibility for some States to include assets outside the scope of Article 129 of the CRR, harms comparability and supervision.
- The existence of varied issuer models for secured bonds and numerous national discretions complicate the market.
- Cover pool monitoring mechanisms present weaknesses, notably the acceptance of internal monitors incompatible with independence principles.
- Extendable maturity bonds, now predominant, require stricter regulation of extension triggers and increased roles for authorities and investors.
- Liquidity and transparency requirements are in place but could be strengthened, especially regarding ESG disclosure at the cover pool level.
- Divergences persist between the CBD and CRR, notably on the treatment of real estate under construction and asset valuation.
- The absence of an equivalence regime for secured bonds issued outside the EU limits market development and European investor access.
- Conclusions:
- The need for increased harmonization of rules, notably by limiting asset eligibility to only the criteria of Article 129 of the CRR.
- The elimination of internal cover pool monitors.
- Clear regulation of maturity extension mechanisms with involvement of authorities and investors.
- Alignment of real estate valuation and eligibility rules for assets under construction between CBD and CRR.
- Introduction of an equivalence regime for secured bonds from third countries.
- A cautious approach regarding the development of European Secured Notes (ESN) aimed at SME financing.
- Recommendations:
- Restrict asset eligibility to only those eligible under Article 129 of the CRR.
- Clearly specify the definition of primary and substitute assets in legislation.
- Remove the possibility of internal cover pool monitors.
- Precisely define maturity extension triggers and strengthen authority oversight.
- Introduce enhanced liquidity requirements and buffer replenishment.
- Limit ESG disclosure to climate risks of real estate assets, annually.
- Align regulation on real estate under construction and asset valuation between CBD and CRR.
- Establish an equivalence regime for secured bonds from third countries, based on CBD principles.
- Renew the debate on ESN depending on political interest and market experience.
- The secured bond market is a pillar of bank financing in Europe, demonstrating strong resilience during financial crises.
- Before 2019, European harmonization was limited, which hindered single market integration.
- The 2019 Covered Bond Directive (CBD) and amended CRR established a minimum harmonized framework.
- Article 31 of the CBD requires the European Commission to report on implementation and consider legislative proposals.
- The Commission requested the EBA in July 2023 to provide a technical opinion on several framework aspects, including performance, risks, new instruments, and ESG issues.
- The objective is to assess coherence, safety, transparency, simplification, and market development of secured bonds in the EU.
- The scope includes analysis of national frameworks, market practices, quantitative and qualitative data collected from national authorities and industry players.
- Limitations concern mainly the 24 Member States with an active framework, with three States without an active market and one in development.
Eligibility of cover assets:
- Three categories of assets are authorized by the CBD: those eligible under Article 129 of the CRR, so-called high-quality assets outside CRR scope, and loans guaranteed by public bodies.
- The majority of Member States authorize only CRR assets; others extend to less standardized, rarely used assets.
- The EBA recommends restricting eligibility to CRR assets to harmonize and strengthen comparability and supervision (p. 29-35).
Cover pool composition:
- Pools include a dominant primary asset and substitute assets.
- The CBD allows great flexibility in defining these categories.
- The EBA advises that these definitions be clearly specified in national legislation to ensure investor transparency (p. 39-45).
Geographical location of assets:
- The CBD allows inclusion of assets located outside the EU/EEA, subject to equivalence of execution rules.
- Some States limit eligible third countries and the share of such assets.
- The EBA considers current provisions robust (p. 46-48).
Intragroup structures and joint financing:
- The CBD authorizes intragroup structures and joint financing to broaden market access.
- Ambiguities remain regarding the combination of certain discretions, requiring clarification (p. 48-52).
Derivatives contracts in the cover pool:
- Derivatives protect against interest rate and currency risks but may be terminated upon issuer default.
- The EBA recommends strengthened safeguards: high-quality collateral deposits, full segregation, and replacement of internal counterparties by independent third parties (p. 53-60).
Cover pool monitoring:
- The CBD allows appointment of a cover pool monitor (CPM), internal or external.
- The EBA finds the internal CPM function incompatible with independence principles and recommends its removal (p. 62-68).
Transparency:
- The CBD requires frequent disclosure (at least quarterly) of pool information.
- The form of disclosure is left to issuers' discretion.
- The EBA supports voluntary adoption of the harmonized HTT model and recommends States encourage it (p. 70-73).
Coverage requirements:
- The CBD sets a minimum coverage regime for bonds, including principal and accessory bonds, with calculations and overcollateralization.
- The EBA identifies national imprecisions and recommends clearer rules and independent control of overcollateralization (p. 75-86).
Extendable maturities:
- These bonds allow maturity extension to facilitate orderly liquidation in case of default.
- The EBA recommends precise definition of triggering events, involvement of authorities in assessing extension necessity, and active investor roles (p. 123-129).
Liquidity requirements:
- The CBD requires a liquidity buffer covering 180 days of net outflows.
- The EBA recommends safeguards for buffer replenishment and consistency with extendable maturities (p. 131-137).
CBD and CRR alignment:
- Divergences exist notably on treatment of real estate under construction and asset valuation methods.
- The EBA advocates full alignment on the stricter CRR rules to simplify and strengthen investor protection (p. 146-156).
Treatment of bonds in case of issuer default:
- The current framework is ambiguous regarding default rules application to secured bonds.
- The EBA recommends clarifying this point in level 1 regulation (p. 157-158).
Framework development:
- Introduction of an equivalence regime for secured bonds from third countries is recommended to broaden the market and investor base.
- The EBA proposes precise criteria for equivalence assessment, based on CBD and CRR principles (p. 102-121).
- Regarding European Secured Notes (ESN) aimed at SME financing, the EBA calls for caution and renewed debate with prior market experience (p. 117-121).
- Established facts:
- The European secured bond market is globally dominant with 2.5 trillion euros outstanding at the end of 2024.
- The CBD has established a minimum harmonized framework but with strong national flexibility.
- The majority of assets used are those eligible under Article 129 of the CRR.
- Issuer models are diversified, including specialized, universal, SPV, or pooling structures.
- Extendable maturity bonds have become the market norm.
- Transparency is ensured through regular disclosures, often according to the HTT model.
- Hypotheses:
- Increased harmonization would reduce fragmentation risks and improve comparability.
- Maintaining certain national flexibilities could continue to generate risks of arbitrary regulation.
- Interpretations:
- The EBA interprets that removing internal monitors and restricting eligible assets will strengthen investor security and confidence.
- CBD-CRR alignment on real estate valuation and assets under construction is seen as a lever for simplification and protection.
- Uncertainties:
- The precise economic impact of proposed changes, notably on compliance costs and market liquidity.
- Acceptance by Member States and market participants of recommendations, especially those limiting national discretions.
- Demand evolution for ESN and feasibility of a third-country equivalence regime.
- The EBA recommends strengthened harmonization of the European secured bond framework, notably by:
- Restricting asset eligibility to only the criteria of Article 129 of the CRR.
- Clarifying the definition of primary and substitute assets in national legislation.
- Removing the possibility of internal cover pool monitors, with a transition period accompanied by enhanced safeguards.
- Precisely defining maturity extension trigger events and actively involving supervisory authorities and investors in oversight.
- Strengthening liquidity requirements, notably buffer replenishment.
- Introducing ESG disclosure limited to climate risks of real estate assets, on an annual basis.
- Aligning regulation on real estate under construction and valuation methods between CBD and CRR.
- Clarifying the treatment of secured bonds in case of issuer default.
- Establishing an equivalence regime for secured bonds issued by third countries, based on CBD and CRR principles.
- Regarding European Secured Notes, the EBA calls for a cautious approach, suggesting renewed political debate and gradual development based on market experience.
- These recommendations aim to improve security, transparency, comparability, and integration of the European secured bond market, thereby contributing to the realization of the Capital Markets Union.
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