On Tuesday 24 July, the European Banking Authority (EBA) published an opinion for the attention of the European Commission, in which it advises against creating a European Secured Note (ESN) for loans to finance infrastructure and provides a number of recommendations concerning loans to SMEs.
Readers may recall that in March, the Commission presented a proposal to create a European label for covered bonds, which will enjoy preferential prudential treatment (see EUROPE 11979). However, the proposed directive does not include loans used to finance infrastructure or loans to SMEs, taking the view that these are riskier assets.
At the time, the Commission started looking into the possibility of introducing another dual-use instrument for loans of this kind, i.e. the European Secured Note, which basically shares the fundamental characteristics of covered bonds, and asked the EBA to provide it with a technical opinion on the matter.
In its opinion, the EBI advises against creating a European Secured Note for infrastructure loans. It considers that a dual-recourse structure for such loans would be inappropriate given the lack of granularity in a cover pool, the complexity of the loan structures and the specific and different nature of infrastructure projects.
It does, however, consider that a new separate category of assets for loans to finance high-quality projects could be considered in the form of a standardised EU infrastructure bond – a concept that has still to be clarified.
As regards loans to SMEs, the EBA considers that the European Secured Note could be structured in the same way as a dual-recourse instrument.
Due to their high risk profile, however, it suggests a more limited framework, particularly concerning cover, liquidity, transparency requirements and strict eligibility criteria.
It also advises against preferential treatment in terms of capital requirements, but suggests that a “differentiated risk-weight treatment compared to unsecured notes could be considered, subject to certain considerations”.
For loans to SMEs, the EBA puts the potential market for European Secured Notes at between €310 and €930 billion and at between €80 and €170 billion for infrastructure loans. (Original version in French by Marion Fontana)