Covered Bonds Will Be Spared in EU Bail-In Rule, Lawmaker Says

European Union plans to impose losses on creditors of failing banks will spare covered bonds and other secured debt, said Gunnar Hoekmark, the lawmaker leading work on the measures in the European Parliament.

“Secured liabilities such as covered bonds shall not be subject to bail-in,” Hoekmark said in an e-mail, referring to the process of writing down lenders’ creditors.

Spanish newspaper Expansion reported today that the EU may consider forcing losses on covered bond investors in future bank rescues as part of legislation to lift the burden from taxpayers. EU nations have injected 1.7 trillion euros ($2.2 trillion) into their banking systems since the 2008 collapse of Lehman Brothers Holdings Inc., according to European Commission data.

Under proposals from Michel Barnier, the EU’s financial services chief, regulators would have the power to impose losses on a crisis-hit lender’s unsecured bondholders, or convert that debt to equity, once the bank’s capital has been wiped out. The writedown plans excluded debt “backed by assets or collateral.”

The law must give “high legal certainty,” Hoekmark said. “This means secured liabilities shall be secured and insured depositors shall be protected.”

“Legal clarity is crucial in order to make the bail-in tool applicable in crisis situations,” he said.

Covered bonds are debt backed by pools of assets, usually mortgages, that remain on the issuer’s balance sheet.

The commission said last month that it is weighing the need for “greater harmonization” of rules for covered bonds as part of broader bid to boost investment in the bloc’s businesses.

Covered bonds “have proved relatively resilient during the crisis,” the commission said. Still, “markets are fragmented along national lines.”

The EU faces a self-imposed June deadline to adopt legislation for handling bank failures, which requires approval from the parliament and national governments before it can take effect.

To contact the reporter on this story: Jim Brunsden in Brussels at

To contact the editor responsible for this story: Anthony Aarons at

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