EU-Med Capital Market Integration and the EU’s Covered Bonds Directive

Abstract I analyze the potential of the EU’s Covered Bonds Directive (EU) 2019/2162 to promote the integration of Mediterranean Partner Countries (MPCs) into the EU’s Capital Market Union. I identify legal and supervisory conditions conducive for a successful development of covered bond (CB) markets. A formal model is presented to show how covered bond finance could be introduced in a banking environment in such a way that problems of asset encumbrance and unsecured debt runs are at least mitigated. Next, I study the question to what extent the EU’s covered bond framework is compatible with Islamic concepts of banking and finance? Finally, some policy objectives of EU and MPC governments are pointed out which can be expected to benefit from secured forms of bank debt funding such as covered bonds.