The European Covered Bond Council (ECBC) has today announced its formal response to the European Commission’s Green Paper on Building a Capital Markets Union (CMU, published on the 18th of February 2015), by calling for the introduction of a new financial instrument in the European Union – European Secured Notes (ESN), to address a funding segment located between the traditional covered bond and high-quality securitisation.
In developing its response, the ECBC has conducted a detailed analysis of current market funding tools and end-user needs, and identified the potential for a new financial instrument that would benefit from the market best practices of both traditional covered bonds (for funding purposes) and securitisation (for funding and risk-sharing purposes). Such an instrument would complement the long-term funding toolkit for European lenders financing SME (small and medium sized enterprise) loans and potentially other types of assets, such as infrastructure loans.
Furthermore, this tool would have anti-cyclical features by combining a robust legal and supervisory framework, dual recourse and standardised asset data disclosure. Embedding the instrument in national legal supervisory frameworks would ensure UCITS compliancy and a substantial, positive regulatory recognition in terms of eligibility for LCR purposes, Solvency II, European Central Bank (ECB) and Bank of England repo, CRA III Regulation, etc.
Two implementation structures/options are envisaged for ESNs: (i) an on-balance sheet dual recourse instrument with a dynamic pool for long-term financing purposes; or (ii) an off-balance sheet dual recourse instrument with static pool that could also offer capital relief as a response to deleveraging needs, as well as promoting risk transfer and risk-sharing.
Various modalities and options for the national implementation of ESNs should allow regulators, supervisory authorities and market participants to identify the best way of introducing this instrument in different market and legislative environments. This would: (i) facilitate a rapid legislative implementation of common pan-European qualitative standards with a bottom-up approach; (ii) guarantee homogenous and comparable characteristics; (iii) facilitate lenders’ and investors’ due diligence; and (iv) create the preconditions for a future pan-European cross-border SME financing landscape.
Commenting on the ECBC response, Luca Bertalot, EMF-ECBC Secretary General, said:
“The covered bond community supports the Commission’s initiative of establishing of a Capital Markets Union and shares the objective of facilitating the long-term financing of the European economy in the interest of financial stability, job creation, and economic prosperity. This response represents a practical market contribution to the CMU debate and demonstrates the Industry’s capacity to support the Commission’s growth agenda.”
Full ECBC response to EC Green Paper
Full press release
© ECBC - European Covered Bond Council
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