Bankers Advising EBA Lambaste ‘Insane’ Liquidity Buffer Proposal

Bankers in a consultation panel advising the European Banking Authority criticized its intention to recommend that covered bonds not be given the highest liquidity status.

The London-based authority’s plan, which was revealed in a Danish government document last month, would limit banks’ ability to use covered bonds to meet liquidity requirements. The move threatens to curb the availability of credit and raise the cost of banking, according to members of the banking stakeholder group.

“We will be pressing the case that this is really insane, that an asset that is really highly liquid, highly reliable, especially in times of crisis, is not given the ranking that perhaps it is due,” Robert Priester, executive director of wholesale and regulatory policy at the European Banking Federation, said in a telephone interview.

The EBA, whose board is due to meet with the banking stakeholder group today, is ignoring the findings of its own staff in recommending covered bonds be treated as a less liquid asset class than government debt, according to the Danish government.

An October review by the EBA found covered bonds to be as liquid as sovereign debt, with the highest rated securities scoring higher. Danish Prime Minister Helle Thorning-Schmidt said Dec. 3 her country is “standing by the Danish mortgage system” and will take its case to the European Commission.

Secondary Market

The EBA is due to publish its official recommendation this month, with draft technical standards set to be finalized by March. The commission is scheduled to decide in June.

EBA labeling of the bonds as less liquid than sovereign debt would put restrictions on their use to fill capital buffers, potentially shrinking liquidity on the secondary market and driving up costs for the loans they fund, according to Santiago Fernandez de Lis, chief economist of financial systems and regulation at BBVA Research and a member of EBA’s banking stakeholder group.

“The exclusion of covered bonds from level 1 assets is a problem for financial markets in Europe and may have a cost in terms of credit availability and cost,” he said in an e-mailed response to questions.

If the EBA prevails, banks will reduce their exposure to riskier parts of the economy, in particular small and medium-sized businesses, to reduce their liquidity needs, Priester said.

Final Decision

“It is precisely that area where people are trying to get more money into,” he said. The Brussels-based industry group will initiate a lobbying offensive if covered bonds are excluded, he said.

Germany’s mortgage industry is also contesting the EBA’s decision, which mirrors a 2010 set of standards from the Basel Committee on Banking Supervision.

Europe has in the past shown a willingness to deviate from Basel standards, and should be ready to do so again to preserve its covered bond market, according to Jens Tolckmitt, chief executive officer of the Association of German Pfandbrief Banks.

“The final decision has still to be taken in the EBA, and the final, final decision will be taken by the commission,” Tolckmitt said. “That is where we are basically putting hope on.”

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