The new plans, which should come into force next year, are designed to strengthen banks’ capital in order to help avert a repeat of the financial crisis. However, the ECB warned that definitions of what can be classed as appropriate capital could allow commercial banks to dump risky assets, such as asset backed securities (ABS), on the Eurozone.
“A possible consequence of the proposed directive could be to provide strong incentives for monetary policy counterparties to package their ABS into the cover pool of such covered bonds, thereby obtaining more favourable treatment, to the detriment of the Eurosystem’s risk exposure,” the ECB said in a legal opinion.
It also criticised plans to scrap a requirement for banks to have top notch ratings on covered bonds. “This could further undermine the credibility and transparency of the covered bonds market and, ultimately, have consequences for financial stability,” it said, adding that a rating requirement should be reinserted into the rules.