20 April 2012

ECBC Response to the Discussion Paper on the Debt Write-Down Tool – Bail-In

The ECBC welcomes the European Commission endeavour to establish a European framework for crisis management in the financial sector and to equip authorities with effective tools to tackle bank crises at the earliest possible moment and avoid cost for taxpayers.

One of those tools could be the debt write-down tool or bail-in which would allow public authorities to allocate unmanageable losses on banks’ shareholders and creditors. This tool would become available when an institution meets the trigger conditions and may be used in both a going concern scenario and a liquidation scenario.

The ECBC would like to seize the opportunity offered by this discussion paper to highlight the particular features of covered bonds which, we believe, should be carefully taken into account when drafting the final version of the Commission’s Proposal.

Covered bonds are issued by credit institutions (the covered bond issuer) and secured by a cover pool of financial assets, typically composed of mortgage loans or public-sector debt. Covered bonds are dual recourse debt instruments: they grant a claim against the issuer in the first place and, additionally, a full recourse to the cover pool of high quality assets in case of issuer default. In other words, covered bonds are designed to survive the insolvency of the issuer and be redeemed according to their original terms of issuance. Hence, if a covered bond issuer defaults or becomes insolvent, its covered bonds will not be accelerated and will be redeemed in accordance with the original terms. This is perhaps one of the most important features of covered bonds and plays a determinant role in their recognition and success.

More so than for other asset classes, the key to covered bond success lie in the legal certainty that is given to investors as to when and under which conditions they will be repaid. Therefore, ECBC believes that this legal certainty benefiting to covered bond investors should be expressly reflected within the legislative text to be proposed by the European Commission within the coming weeks.

Full response

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