Banking Union: Consultation from the European Commission on the sovereign bond-backed securities initiative
7 February 2018
Regulatory News Alert
On 23 January 2018, the European Commission launched an impact assessment on a new initiative aiming at enabling a regulatory framework for the development of sovereign bond-backed securities (SBBS). SBBS are novel financial instruments that consist in securitizing a portfolio of euro-area central government bonds.
The European Systemic Risk Board (ESRB) already proposed these instruments in a working paper in 2016 (#21/2016); it was then relayed by the EU Commission as a possible measure to advance the completion of the Banking Union and the deepening of the Economic and Monetary Union.
With the SBBS, banks and other investors would have access to a new type of investment product that aims at facilitating the diversification in sovereign exposures and thus improving the management of risks.
Aim of the initiative: Adapt current regulatory framework to SBBS
According to the European Commission, the current regulatory framework discourages the issuance of such securitized instruments by failing to adequately reflect their characteristics. Under current rules, SBBS would be treated as regular securitization products, and hence significantly less favorably than their standing would authorize (such as capital requirements, eligibility for liquidity coverage and collateral, etc).
In the new text, the EU Commission proposes to amend the current regulatory framework by including the following content:
- A legal definition of SBBS, including a list of features required for any (privately produced) securitization of euro area national government bonds to qualify as SBBS.
- Provisions to ensure that regulation treats investments in SBBS and in government bonds in a consistent manner.
The Commission is expecting feedback from citizens and stakeholders on this initiative before 21 February 2018.
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