Covered Bonds : European Secured Notes: An alternative to covered bonds

The European Banking Authority (EBA) published a report presenting the outcome of its assessment to the European Commission’s call for advice on the European Secured Notes (ESNs) . In addition, it put s forward recommendations on key aspects for the European Commission to consider when possibly designing the legislative framework for SME ESNs. The main purposes of the Call for Advice is to i ) assess whether or not a covered bond like dual recourse instrument may provide a useful funding alternative to banks engaged in lending to SMEs and lending t o infrastructure project and ii ) to determine an appropriate EU framework and regulatory treatment for this new product. The assessment may possibly pave the way to the creation of a new distinct pan-European asset class. As such , this report includes an assessment of the business case for ESNs, an analysis of the potential implications of issuances of ESNs on asset encumbrance and a data analysis of the risk profile of SME loans and project finance. It also contains the suggestions of the EBA on the pool eligibility criteria, the struct ure and the features of ESNs a s well as some considerations regarding the potential regulatory treatment of ESNs. As a conclusion, the report puts forward five main policy recommendations on crucial aspects for the European Commission to consider when possibly designing the legislative framework for ESNs. Contents 1. Business case for ESNs………………………………………………………… …. 2 1.1. Qualitative assessment …………………………………………............................2 1.2. Potential Size of the ESN market…………………………………………….........2 1.3. Impact on asset encumbrance…………………………………………………….. 3 2. ESNs………………………………………………………………………………….. 3 2.1. SME ESNs …………………………………………………………………………… 3 2.2. Infrastructure ESNs …………………………………………………………………. 5 2.3. Regulatory treatment ……………………………………………………………….. 5