The European Commission wants to harmonise rules for covered bonds across the EU to develop what it sees as a reliable and stable source of funding. But proposed amendments to its plans could hinder, rather than help, the market for bonds with long maturity extension provisions, known as conditional pass-through covered bonds
Covered bonds with maturity extension structures longer than one year are riskier and less liquid to investors and should be subjected to a tougher risk weight regime.
That's the verdict of the Committee on Economic and Monetary Affairs of the European Parliament, which has proposed a gradual increase in the risk weights for these bonds, ranging from an additional five percentage points to as much as 20 percentage points.
The proposals put AAA-rated conditional pass-through covered bonds at a risk weight disadvantage versus any lower investment grade rated CRR eligible (soft) bullet alternative.
This seems peculiar. Indeed, the risk weight proposals are based on untested assumptions. Read the full report here.