Probability & Partners: Harmonising EU covered bonds

October 14, 2025

By Yusi Wang, Senior Risk Consultant at Probability & Partners

The covered bond market is an important and well-established part of the EU financial system. It provides long-term, low-cost funding for banks and helps maintain financial stability. According to the European Covered Bond Council (ECBC)^[1], EU-issued covered bonds accounted for approximately € 2.5 trillion (out of € 3.3 trillion worldwide) in outstanding volume by the end of 2024.

 

While the EU covered bond market does not expect major changes next year, one key development worth noting is the EBA's report on the EU covered bond review, published in September 2025. The European Banking Authority (EBA) advises 28 policy recommendations across various areas, which could lead to further regulatory developments impacting both EU and non-EU covered bond markets and participants.

Background

Before 2019, a minimum, high-level EU-wide harmonisation of national frameworks was implicitly granted. However, national discretions existed across different instruments and risk profiles, resulting in the absence of a truly harmonised EU covered bond framework. On 27 November 2019, the EU adopted a covered bond legislative package that established a comprehensive minimum harmonisation framework, which all covered bonds issued in the EU must meet.

As a follow-up, the European Commission asked the EBA to provide a review and technical advice, for which a report was published in September 2025. The EBA carried out an analysis of how the EU covered bond framework is performing. The report is comprehensive and includes 28 policy recommendations that may, in the future, lead to legislative updates.

What are the key EBA recommendations?

• Harmonisation of the EU covered bond framework

The EBA has identified several areas with potential for further harmonisation, particularly regarding the structural features of covered bonds. These include, for example, the eligibility of cover assets limited to those that qualify under Article 129 of the CRR, clearer legislative definitions of primary and substitution assets in the cover pool, cover pool monitor, extendable maturity structures, and the use of liquidity buffers.

• Strengthening safeguards and disclosure in all national frameworks

The current covered bonds directive (CBD) ensures product quality and safety through various provisions supporting a dual recourse mechanism. Key safeguards include requirements for asset quality, effective coverage, and investor information disclosure. However, variations in the strictness of these safeguards and disclosure practices highlight the need for a thorough assessment of their overall effectiveness in protecting consumers.

Therefore, the EBA recommends strengthening safeguards by requiring counterparties to post high-quality collateral and ensuring full segregation of contracts. Furthermore, the EBA provides recommendations on the current statutory coverage regime, including advice for Member States to establish clearer rules regarding certain definitions within these regimes, to further strengthen the conditions for deviations from statutory over-collateralisation, and to partly disregard or carefully reassess collateralised cover assets in default for coverage purposes.

• Simplifying the framework by aligning further the CBD and CRR

The EBA has identified inconsistencies in the treatment of covered bonds between the CRR III and the current covered bond framework. The differences are found specifically in the treatment of real estate property under construction,  valuation methods for immovable property, and defaulted issuers. Further harmonisation across regulatory frameworks could help reduce institutions’ compliance costs and promote a more prudent valuation approach.

Although it is still uncertain which regulatory framework will take the lead in further harmonisation of the identified areas, the EBA expresses the view that alignment with the CRR III requirements would be preferable, as generally speaking, the CRR III rules are more stringent than those under the covered bond framework for the purpose of cover asset eligibility, providing a higher degree of protection for covered bond investors.

For example, under CRR III, one of the criteria for real estate property to qualify as eligible collateral is that the property must be completed, with only a few exceptions permitted under strict conditions. In contrast, for cover asset eligibility under the covered bond framework, there is divergent treatment among Member States, some have already aligned with CRR III, while others still allow the recognition of unfinished real estate property.

In this report, the EBA specifically advises that further analysis should be carried out and inconsistencies should be resolved in the identified areas, which could potentially lead to proposed amendments to the Level 1 text.

• Developing and expanding the EU covered bond framework

One important aspect of the EBA report is the recommendation to establish a third-country equivalence regime. This means that covered bonds issued by non-EU institutions should meet the EU covered bond criteria, such as the maturity of the domestic covered bond market, in order to qualify for similar preferential prudential treatment (e.g. risk weights, liquidity haircuts) as EU covered bonds. The EBA recommendation also includes details regarding the scope and the actual assessment process.

The third-country regime is mostly relevant for issuers of non-EU covered bonds. A country-by-country assessment can be expected from regulators to determine whether the third-country equivalence criteria are met. This could be a significant regulatory exercise, especially since it remains unclear whether, or how, non-EU countries will establish similar assessments for EU-issued covered bonds. For investors, it is still too early to determine how to optimize their covered bond portfolios in the short term due to the uncertainty surrounding the regime, a more gradual adjustment is expected as future regulatory developments unfold.

One interesting development mentioned in the EBA report is the European Secured Notes (ESNs), which have been under the EBA’s study since 2018. The idea behind introducing ESNs is to provide issuers with access to a relatively cheaper source of funding to support SME financing, using an instrument that may be more suitable than more complex structures such as securitisation. According to the EBA, industry feedback suggests that securitisation currently does not appear sufficiently suited for SME funding. Therefore, the EBA recommends reviewing the topic in the medium term to assess market developments and the level of interest in using ESNs as a complement to synthetic securitisation. In this regard, the EBA notes that the industry has already indicated its intention to issue a first ESN prototype in the near future.

In conclusion

Although the EBA recommendations do not have an immediate impact on institutions, as the legislative process may take some time before changes take effect, the EBA report provides useful insights and regulatory direction for institutions to assess the medium- to long-term impacts on their funding profile, liquidity position, and balance sheet strategies. Developments in the covered bond framework should also be assessed in conjunction with those in the securitisation framework to achieve an optimal capital and liquidity strategy.

[1] https://hypo.org/sites/default/files/storied_data_report/2025-09/Factbook_2025.html