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News on Covered Bonds: Belgium likely to have Covered Bond legislation by the end of 2012


Belgium likely to have Covered Bond legislation by the end of 2012


14th July, 2012: Draft Covered Bonds legislation that was introduced by the National Bank of Belgium ("NBB") in 2011 is most likely to be approved by the Belgian Parliament in October, 2012, making another European Country with a dedicated legislative framework for issuance of Covered Bonds.

 The draft law is based on the German Pfandbrief model with the only difference that it is more elaborate as far as deal structures are concerned as it incorporates additional structural features having a European legislative approach to documentation.

The new regulatory framework, once approved, would be extremely beneficial for the relatively inactive Belgium Banks providing them with an alternate and cost-effective funding source thus helping Belgium to be at par with the rest of Western Europe.

Signs of market revival can already be seen as two famous Belgian banks Dexia Banque Belgium, the 100% state-owned Bank and KBC are ready to issue [1] covered bonds benchmarks backed by strongly performing prime residential Belgian mortgage in January right after the regulatory framework is in place.

Key features of the upcoming legislation:

  • Issuer Structure: Only Universal Credit Institutions with special license obtained from NBB would qualify as eligible issuers who would own the cover pool. The bondholders would have direct recourse to the credit institution this make the legislation very even more significant.

  • Framework: The bonds would be governed by special covered bond legislation and a specific legal framework superseding the general insolvency laws which would provide cushioning against the bankruptcy of the issuer of covered bonds.

  • Cover Assets: The cover pool can be composed of assets forming part of the following categories:

  • Mortgage loans;

  • Group Originated Senior mortgage securities

  • Exposures to credit Institutions

  • Exposures to Public Sector entities and/or senior public sector ABS

For details on eligibility criteria of each type of asset class click here

  • Valuation of the mortgage cover pool and LTV criteria: Loan to Value (�LTV�) would be calculated on the market value of the bonds. The LTV limits used for calculating collateralisation rates for the cover pool would be 80% for residential mortgages and 60% for commercial mortgages. Further there is no additional LTV limit on a portfolio basis and the bond holders would get the benefit of that portion of the loan that exceeds the LTV cap.

  • Asset-Liability Guidelines: The draft legislation states that the issuer would need to manage its interest and currency risk exposure for each covered bond program and would also need to comply with the liquidity test. The draft legislation also provides for a number of asset cover tests with coverage calculations on a monthly basis. It mandates the value of the cover assets to exceed the minimum overcollateralization levels of 5% at all times. The draft does not make any mention about the stress test scenarios and their frequency but states the grace period of 14 days in case of a breach of liquidity risk mitigants. Maintenance of coverage tests would be the responsibility of the Supervisory authority and/or Trustee/Cover pool monitor.

  • Cover Pool monitor & Banking Supervision: The cover pool monitor would be an entity independent from the issuer and covered bond issuers would require a special license of additional requirements compared to general banking supervision regulations. The cover pool monitor would perform reporting obligations and ensure compliance with legal and regulatory requirements.

The Belgium Covered Bond regulatory framework, once approved in the Parliament would provide the Belgian Credit Institutions an important funding instrument. The framework seems very robust and market revival is expected sooner, but there might be deviations in the final framework from the draft as it stands today.


[Reported by Abhijit Nagee]


[1] As reported in Euroweek :



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