On 21 June 2017, members of the European Parliament (MEPs) called for limited harmonisation and a common definition of covered bonds in the European Union.

As part of their action plan for a Capital Markets Union (CMU), the Commission had proposed an EU framework for a more integrated covered bond market in order to reduce funding costs for banks issuing covered bonds.

With an outstanding volume of EUR 2 trillion in 2015, the covered bond market in the EU is substantial, but currently characterised by a highly inhomogeneous legal framework consisting of separate national rules. Covered bonds are financing around 20 % of all mortgages in the EU.


In a first consultation paper of 2015, the Commission outlined three alternative scenarios:

  1. Non-binding recommendation by the Commission leading only to voluntary convergence of national covered bond laws;
  2. Full harmonisation of the covered bonds framework throughout the EU replacing existing national laws; or
  3. Introduction of an alternative covered bond regime that would supplement, but not replace, the existing national covered bond rules.

The consultation ended in early 2016 without the Commission following up with a concrete proposal.

Part of the delay may stem from the need to find a balance between a strong and sound covered bond market and a functioning bank resolution regime introduced by the Bank Recovery and Resolution Directive (BRRD). As covered bonds are excluded from bail-in, an effective bank resolution may be impacted when a credit institution issues large portions of covered bonds that keep assets from other creditors and are exempt from bail-in.

Call by MEPs

MEPs from the Economic and Monetary Affairs Committee have now called for the Commission to propose a Directive for a European covered bond framework. The MEPs are concerned, however, that any new framework might disrupt proper functioning, successful and sound national models. Therefore, the MEPs propose that:

  • any Directive shall only provide for a limited level of harmonisation focusing on high-quality standards and best practices;
  • a common definition of "covered bonds" throughout the EU shall be introduced;
  • a three-tier market shall be introduced based on the quality of existing national covered bonds legislation; some covered bonds would qualify as "Premium Covered Bonds" (PCB) and some as "Ordinary Covered Bonds" (OCB). In addition, a new category of "European Secured Notes" (ESN) shall be introduced. ESNs would consist of non-government backed infrastructure investments or credits to small and medium-sized enterprises (SMEs); and

covered bonds shall be subject to special public supervision and transparency requirements that facilitate a comparison of the covered bonds frameworks in the EU.