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Current figures confirm the trend towards more strongly secured forms of funding: In 2012 loans totalling €1,100 billion mature at eurozone banks, 80 per cent of which are unsecured – but of current 2012 refinancing, only 20 per cent is unsecured. The increasing proportion of secured refinancing will mean that, in case of insolvency, an ever larger part of the assets of a bank will be pledged with priority to specified investors (asset encumbrance). In consequence, where there is insolvency of an issuer, creditors holding unsecured bonds will seek recovery from a relatively small and mostly less valuable insolvency estate. This does not affect the claims of depositors against deposit guarantee schemes: Each depositor will receive compensation up to a specified upper limit regardless of the amount of the insolvency estate, although the right of recourse of the deposit guarantee scheme would also suffer under asset encumbrance.
Countries with new covered bond laws are limiting the volume of covered bonds in order to protect creditors of unsecured funding (for example, in Canada to 4 per cent of total assets, in Australia to 8 per cent, in New Zealand to 10 per cent). This appears to make sense, so as to improve acceptance of the new laws by creditors of unsecured claims and so that an overly sharp increase in encumbrance is limited from the outset.
A more flexible limit on asset encumbrance results from the proposal of the EU Commission for a Directive to establishing a framework for the recovery and resolution of credit institutions and investment firms dated 6 June, 2012. Article 37 ff of the Proposal sets out the basis for a bail-in. Amongst other matters, the stipulation by national authorities that ‘sufficient’ amounts of liabilities be made available for restructuring should be ensured. This expressly excludes secured liabilities to the extent of the value of the collateral; a national option is currently planned for covered bonds within the meaning of Article 22 (4) of the UCITS Directive (also includes Pfandbriefe under the Pfandbrief Act).