The European Commission’s proposed new Bank Recovery and Resolution Directive (BRRD) will have the most impact on covered bonds in 2014, becasue the bonds are not be subject to a so-called “bail-in",said Standard & Poor’s in a report on Wednesday.

The BRRD sets harmonized standards for national resolution regimes across Europe in compliance with the Financial Stability Board’s key attributes. It aims to reduce the costs of bank resolution, make banks resolvable without using taxpayer funds, and push bank creditors to exert more market discipline by proposing creditor-funded recapitalization – otherwise known as bail-in.

Under the proposal, covered bonds are not be subject to a bail-in. As a result the non-bailed in status is "likely to generate further investor interest in the asset class,” explained S&P in the report.   

S&P will need to see the final version of the proposal before it determines what impact, if any, the regulatory framework will have on covered bonds ratings.

The ratings agency wrote in the report that “if the proposed bail-in solution becomes likely—meaning that the covered bonds would stay with the remaining non-bailed part of the bank and that other parts of the bank would face a bail-in—several questions, including the ongoing availability of a sufficient level of overcollateralization to support our ratings, would remain.” 

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