EBA finds German waiver on covered bonds justified

11 April 2017

The European Banking Authority (EBA) published today an Opinion addressed to the German Federal Financial Services Supervisory Authority (BaFin) following the Competent Authority's notification of its decision to introduce a partial waiver of Article 129 (1)(c) of the Capital Requirements Regulation (CRR), which specifies the conditions for the eligibility of covered bonds in relation to risk weight preferential treatment. Given the significant potential concentration problem in Germany, the EBA is of the opinion that the application of a partial waiver is adequately justified.

For covered bonds to be eligible for risk weight preferential treatment, their total exposure to institutions that qualify for credit quality step 1 (CQS1) must not exceed 15% of the nominal amount of outstanding covered bonds of the issuing institution, as specified in Article 129(1)(c) of the CRR. This requirement may be partly waived by a Competent Authority, after consulting the EBA, if significant potential concentration problems in the Member States concerned can be documented. The partial waiver allows for exposures to institutions that qualify for credit quality step 2 (CQS2) for up to 10% of the total exposure.

Following the German BaFin's notification of its decision to partially waive Article 129(1)(c) of the CRR, the EBA has assessed the evidence provided to support the measure, namely the current classification of German credit institutions in relation to the CQSs assigned, the current composition of the German covered bond market, and the type and nature of exposures to credit institutions that covered bonds regularly assume.

On the basis of the evidence provided, the EBA is of the opinion that Germany has a significant potential concentration problem stemming from the application of the CQS1 requirement and, therefore, the partial waiver is adequately justified.

BaFin's general administrative order was issued on 22 December 2014 and came into effect on 1 January 2015, and was published on the BaFin's website and in the Federal Gazette (Bundesanzeiger).

Legal basis and next steps

The EBA's competence to deliver the Opinion is based on Article 29(1)(a) of Regulation (EU) No 1093/2010. In accordance with Article 14(5) of the Rules of Procedure of the EBA Board of Supervisors, the Opinion has been adopted.

The German BaFin will be monitoring the situation and on the basis of information that documents the concentration problem will assess the need for the waiver to be in place. If the concentration problem is no longer significant, the measure will be repealed.