02 November 2010

The EMF publishes October 2010 Mortgage Info Newsletter

The European Mortgage Federation uses its Newsletters to highlight and state its position on certain policy issues thst may affect mortgage lending in the Euro Area. For the October issue, it focuses on  Basel III/CRD IV, tying and bundling of products, post-trade transparency in the covered bond market and the choice between senior unsecured and covered bonds.

On Basel III/CRD IV, the EMF aggrees that  the Commission has a difficult task in transposing Basel III into European legislation, whilst at the same time taking due consideration of the European business models. Basel III does not leave much room for local manoeuvre and the timelines are extremely tight. Therefore, the EMF will be putting its battle bowler on to ensure consideration of the mortgage industry remains part of the process throughout these final stages. The EMF appreciates the opportunity to continue cooperating with DG Market in moving closer to achieving the common goal of financial stability.

In the area of tying and bundling of financial products, the search for evidence is still ongoing, but there are areas where the EMF aggrees with the Commission on how practice should continue going forward. First,  efforts should be made to improve information to consumers on tied and bundled products and their advantages. Information should be adequate and understandable, and accompanied by explanations. Industry representatives stressed the importance of financial education and extended an invitation to consumer representatives to engage with the industry in a joint initiative to foster better financial education of consumers.
 

The Committe of European Securities Regulators (CESR) recommended that the Commission consider the adoption of a mandatory post-trade transparency regime in the future Markets in Financial Instruments Directive (MiFID). The EMF highlights that traders have identified some potential adverse impacts of immediate reporting of bond trade information, such as compromise of dealers' confidentiality and ability to take on significant positions as markets move quickly to adjust prices. This could reduce liquidity by making trade execution costlier. The EMF advises that a compromise be reached that will benefit the market as a whole as well as serve to increase both transparency and liquidity.

In trying to answer the question: "Is it time to switch from senior unsecured debt to covered bond?" the EMF explains that the key reasons for investing in senior unsecured bank debt are the usually higher yield compared to covered bonds and the seniority of the claim versus the subordinated capital and equity investors. The main advantages of covered bonds are the double recourse to the issuer and the cover pool, the higher
rating and the favourable regulatory treatment. The EMF views the current anomalies in the pricing of covered bonds relative to senior unsecured bank debt as a good opportunity to switch into covered bonds, since the tight spread between the two asset classes for certain issuers means that the spread give-up for investors will be relatively small and those investors switching to covered bonds will be more than compensated by the aforementioned advantages of this asset class in terms of higher rating and additional investor protection.

© EMF