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Baltic States will harmonise legislation for issuing covered bonds

31. October 2019 - 15:40

The ministries of finance of Estonia, Latvia and Lithuania, together with the European Bank for Reconstruction of Development and other banks, have prepared their final proposals for creating the legal framework required for developing a common Baltic covered bond market.

“In isolation, the mortgage credit market serving as the collateral for covered bonds is too small in each Baltic State, which therefore renders issuing and administering covered bonds more expensive. By allowing for this in all three countries together, issuing covered bonds will become more feasible for banks, and respectively, their acquisition will become more attractive for investors,” said Thomas Auväärt, Head of the Financial Markets Policy Department of the Ministry of Finance.

A well-functioning pan-Baltic legal framework for covered bonds must take into consideration local particularities while harmonising the legal framework to a major extent in order to create legislation as common as possible in relation to covered bonds in all the Baltic States and render issuing covered bonds more feasible.

Based on the proposals provided in the completed report, Estonia, Latvia and Lithuania will be able to amend their legislation such as to allow banks to issue covered bonds on similar terms and conditions in all three countries, thereby ensuring the same level of protection for investors all over the Baltic States. The rest of the proposals are related to collateral for covered bonds and the administering thereof, as well as suggestions for ensuring sufficient supervision over the banks issuing covered bonds.

Currently, all three countries are preparing amendments to legislation in relation to covered bonds. Even though the pace is different, the goal is to complete the harmonised legal environment for issuing covered bonds by the end of 2020. In Estonia, the Covered Bonds Act has been adopted and it has entered into force. At this time, amendments to the Act in force are being prepared on the basis of both the proposals in the aforesaid report as well as the Covered Bonds Directive of the European Union.

A covered bond is a special type of bond that carries a low risk and can only be issued by a bank that has been granted a respective authorisation. Claims of the bank against recipients of home loans above all serve as collateral for this bond. Claims against recipients of loans secured with commercial property or loan claims against the state or local authorities may also serve as collateral.