July 1, 2014 / 11:01 AM / in 4 years

EU banks watchdog backs keeping low capital charges on covered bonds

LONDON, July 1 (Reuters) - European Union banking regulators has backed maintaining a low capital treatment for top quality covered bonds against the risk of default, a recommendation Denmark and other major players in the 2.8 trillion euro global market will welcome.

The European Banking Authority (EBA) was asked by the bloc’s executive European Commission for advice on how to treat covered bonds in new EU bank capital rules.

Covered bonds are debt backed by pools of home or commercial property loans, and 90 percent of the global market is based in Europe, especially in Denmark, Germany, Spain, France and Sweden.

“The EBA is of the opinion that the preferential risk-weight treatment that certain covered bonds received across the EU in accordance with the Capital Requirements Regulation is appropriate,” the pan-EU banking watchdog said in a statement on Tuesday.

“But it advises to strengthen the framework by introducing further qualifying criteria for their preferential treatment.”

The EU executive will now decide whether to put EBA’s recommendations into law that would probably take effect by around late 2015.

Currently, covered bonds have a very low risk weighting of 10 percent, meaning the amount of capital that must be held against them in case of default is minimal. (Reporting by Huw Jones, editing by Steve Slater)

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