New legislation follows technical assistance project
The Slovak Republic has become a pioneer in creating the legal foundations for covered bonds with amendments to the relevant law in line with best practice recommendations by the European Banking Authority (EBA).
The amendments were adopted by the Slovak parliament following a technical cooperation project between the Ministry of Finance of the Slovak Republic and the EBRD. The cooperation under the Bank’s Local Currency and Capital Markets Initiative identified areas for improvement, as the existing framework was only compliant with 6 out of 17 best practices for covered bonds established by the EBA.
The EBA’s best practice guidelines were published in December 2016 and are expected to form the basis of a Covered Bond Directive announced as part of the European Union’s Capital Market’s Union initiative.
Following this experts drafted amendments to the existing legislation including the removal of a refinancing ratio for mortgages, the elimination of a risk of acceleration of the bonds, ensuring dual protection for investors and safeguarding an appropriate loan-to-value ratio level. The changes were urgently required to remove the risk that Slovak covered bonds would lose preferential treatment in terms of bank capital and liquidity buffer as prescribed by the EU legislation. The new law will enter into force on 1 January 2018.
Peter Kažimír, Minister of Finance of the Slovak Republic, said: “I believe the changes will modernise and stabilise the financing of Slovak banks and will also contribute to the development of the Slovak capital market. At the same time, protection for investors and long-term financing of mortgages will be strengthened. This can reduce the pressure on the costs of mortgage loans”.
Pierre Heilbronn, EBRD Vice President, Policy and Partnerships, said: “We are very pleased to see the covered bond reform in the Slovak Republic completed. The alignment with international standards will provide a significant boost to the further development of this important market. The EBRD supports the development of covered bonds as they combine safe long-term funding for banks with a great transition story. Behind every covered bond there are hundreds of mortgage loans, and behind every mortgage loan there is a household and a family.”
Developing local capital markets is one of the EBRD’s priorities in its work to strengthen the resilience of the economies of the countries where the Bank invests. Resilience is one of the six transition qualities defining the EBRD’s work. The Bank believes that a well-functioning market economy should be more than just competitive; it should also be inclusive, well-governed, environmentally friendly, resilient and integrated.
Covered bonds are a long-term funding tool backed by assets on the issuing banks’ balance sheets such as mortgages. They are viewed as low-risk investments and are a well-established instrument in Western markets. The EBRD is ready to support the legislative reform which enables the issuance of covered bonds in line with the best market standards and to invest in new covered bonds in the regions where it operates as this instrument can make an important contribution to the stability of banking systems.
Together with the Slovak covered bond reform, the Bank also engaged, under the Local Currency and Capital Markets Initiative, in reform work in a number of countries including Croatia, Lithuania, Poland, Latvia, Estonia and Romania.
The EBRD earlier this year rolled out a €200 million framework for mortgage covered bonds in the Slovak Republic with the aim of strengthening the development of the local capital market. The technical cooperation project which led to the amendment of the covered bond law was jointly financed by the Ministry of Finance of the Slovak Republic and the EBRD Shareholder Special Fund.