Covered bonds are a cornerstone of long-term finance for many EU Member States as a key instrument to channel funds to the property market and public sector entities. Covered bonds are debt obligations issued by credit institutions which offer a so-called double-recourse protection to bondholders: if the issuer fails, the bondholder has a direct and preferential claim against certain earmarked assets and an ordinary claim against the issuer's remaining assets.
Covered bond outstanding volume in the EU reached €2.5 trillion in 2014, making European credit institutions global leaders in these markets. Covered bond markets in the EU remain largely fragmented along national lines and performance varies greatly between Member States. This fragmentation constrains standardisation in underwriting and disclosure practices and creates obstacles to deep, liquid and accessible markets, in particular across borders.
An EU framework for covered bonds
As part of the capital market union action plan, the Commission is working to develop an integrated European framework for covered bonds, based on high-quality standards and best market practices.
In March 2018, the Commission proposed a dedicated EU framework for covered bonds, consisting of a directive and a regulation (see below).