FI plans partial waiver to avoid concentration after EBA endorses Danes

Jan 9th, 2015

The Swedish FSA is implementing a partial waiver from the application of CRR covered bond requirements that could cause concentration risk after the European Banking Authority agreed that a similar move in Denmark is justified.

EBA imageUnder Article 129(1)(c) of the Capital Requirements Regulation (CRR), exposures to credit institutions that are used as collateral for covered bonds (which are to achieve preferential treatment) must not exceed 15% of the nominal amount of outstanding covered bonds of an issuer and be credit quality step 1 (CQS 1) — i.e. at least AA-. Competent authorities are, however, able to partially waive this requirement and allow CQS 2 (at least A-) up to 10% of the total after consulting with the EBA.

The Danish FSA, Finanstilsynet, submitted a proposal for such a partial waiver on 8 May 2014, according to the EBA, highlighting that only one credit institution in Denmark qualifies as CQS 1, Nordea Bank Danmark. On 19 December the EBA said that on the basis of Finanstilsynet’s submission, there is sufficient evidence of a potential concentration problem in Denmark.

“This has the potential to result in prudential concerns and concerns related to the degree of competition in the financial market,” it said. “The EBA is therefore of the opinion that the establishment of a partial waiver is currently adequately justified.”

The EBA also laid out factors it would take into account when assessing proposed partial waivers and the Swedish FSA (Finansinspektionen, or FI) announced its plan on 29 December, noting the publication of the EBA’s opinion regarding the Danish proposal.

“Finansinspektionen will implement the partial waiver within its jurisdiction,” it said. “This is done in order to avoid the potential concentration problem that would otherwise arise from the restriction of possible exposures.

“The implementation of the partial waiver does not result in lower requirements on issuers of Swedish covered bonds,” it added, “as the partial waiver means that the current rules will continue to be in place.”

According to a covered bond analyst, the German regulator, BaFin, has also moved to allow for exposures to credit institutions other than those of CQS 1.

“We expect other European countries’ banking regulators to take up this option to lower the credit standards required of bank assets,” he said, “since generally very few European commercial banks now have issuer ratings compatible with CQS 1.”

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