LONDON, Feb 23 (Reuters) - Europe’s national patchwork of covered bond markets will have a regional brand and benefit from lower capital charges to increase market funding for the economy, the European Union’s financial services chief said on Friday.
The two trillion euro ($2.46 trillion) market is popular because covered bonds issued by banks have stronger protections for buyers than standard debt.
They are also backed by safe long-term assets such as mortgages and public sector loans.
Covered bonds are popular in countries such as Germany with its Pfandbrief sector, and the EU’s executive European Commission said on Friday it would propose a European legal framework next month to encourage growth in the sector.
“They are an important funding tool for banks and the wider economy in countries like Germany, but in other countries they are barely in use,” European Commission Vice President Valdis Dombrovskis told a conference in Berlin.
The proposed new framework will “specify a common definition to receive an EU covered bond label and benefit from preferential capital treatment”, Dombrovskis said.
He said the proposal would build on the strengths of existing national rules, and respect the characteristics of well-functioning national markets.
Lawmakers in the European Parliament, which will have joint say with EU states on Dombrovskis’ proposal, have called for limited harmonisation to avoid disrupting national markets.
Brussels wants the sector to grow as part of its capital markets union (CMU) project to encourage more corporate funding from markets and reduce the region’s reliance on bank loans.
The planned departure of Britain, the EU’s biggest financial market, is also prompting Brussels to redouble efforts to push the CMU project forward.
The market will be looking at how closely the European Commission’s proposal will track recommendations from the bloc’s banking watchdog.
The European Banking Authority has called for a cautious, three-step approach, given the differences between national rules.
$1 = 0.8126 euros Reporting by Huw Jones; editing by Jason Neely