Non-UK covered bonds are no longer eligible as level 2A in the LCR portfolio for UK financial institutions

On 8 April 2025, the PRA (Prudential Regulation Authority) published a modification by consent concerning the treatment of non-UK covered bonds in the Liquidity coverage ratio. According to our understanding, non-UK covered bonds will no longer be eligible for inclusion in the LCR portfolio of UK financial institutions. UK covered bonds, classified level 1, will be the sole eligible assets within this portfolio. The PRA has implemented a grandfathering provision, allowing banks that have incorrectly applied rules regarding the inclusion of third country covered bonds in level 2A High quality liquidity assets to continue considering these bonds eligible, up to a maximum value determined at 31 January 2025. However, the redemption of these covered bonds cannot be replaced. The Bank of England's repo eligibility criteria remain unchanged, French and German covered bonds continue to be accepted as collateral. This decision may impact the primary GBP covered bond market with certain countries (such as Singapore, Canada, Australia) historically active in this market, potentially opting to favor the euro market. This decision may also stem from the lack of clarification regarding the LCR eligibility of UK covered bonds for EU investors following Brexit. To summarize, the UK financial regime has not been recognized as equivalent to the EU by the European Commission since Brexit. In response to the PRA’s statement, EBA may choose to clarify the status of UK covered bonds for EU investors. Nonetheless, we do not anticipate any changes to the ECB’s repo eligibility for UK covered bonds, as the UK continues to be a G10 country. The EBA’s recommendation regarding a third country equivalence regime expected to be published by June 2025 could potentially pave the way for some negotiations on cross equivalence between the European Commission and the Bank of England in the future. However, any final decision is unlikely to occur before 2026 or 2027.