On October 20, 2015, the European Commission published a report (COM(2015) 509 final), addressed to the European Parliament and the Council of the EU, on capital requirements for covered bonds as required by Article 503 of the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The Commission’s report follows on from the recommendations in the July 2014 report of the European Banking Authority (EBA) on EU covered bond frameworks and capital treatment.

In the report the Commission considers:

Preferential risk weighting for covered bonds. Credit institutions investing in covered bonds qualifying under Article 129 of the CRR are allowed to hold lower levels of regulatory capital in relation to those instruments than would otherwise apply to senior unsecured bank debt. The Commission agrees with the EBA’s recommendation that the preferential risk weights in Article 129 and the own fund requirements for specific risk in Article 336(3) of the CRR remain an adequate prudential treatment for qualifying covered bonds.

Preferential risk weighting for aircraft loans. Covered bonds secured by aircraft loans are not currently eligible assets under Article 129. The EBA concluded that it would not be appropriate to include these loans as eligible assets and accordingly the Commission has decided not to make any proposals to amend Article 129 of the CRR for this purpose.

Preferential weighting for guaranteed residential loans. Guaranteed residential loans are currently subject to the eligibility requirements in Article 129(1)(e). The Commission’s view is that it is appropriate to continue treating these loans as eligible assets.

Article 496 derogation. The Commission was mandated by Article 503 to review whether the derogation set out in Article 496 of the CRR is appropriate and should be applied to other types of covered bonds. Article 496 sets out a derogation for senior units issued by French Fonds Communs de Creances or equivalent securitization instruments. The Commission intends to await feedback to its September 2015 consultation paper on an EU covered bond framework before taking decisions on these issues.