Belgian bankers are waiting for the country’s central bank to release a revised draft covered bond law that, according to Dexia analysts, could be in place by year-end. The analysts highlighted treatment of asset segregation, CRD compliance and securitisations in a review of the legislation.

Discussions about a covered bond framework have been taking place since at least 2009 between Belgian banks, the National Bank of Belgium (NBB), the Belgian financial supervisory authority (FSMA), and law firms. Dexia’s analysts said that it is expected that Belgium will have a dedicated legal framework by the end of 2011.

“Belgium is currently one of the few European countries that has no dedicated legal framework in place,” they said in a special research note. “However, it should not take too long anymore before Belgian credit institutions can use covered bonds as an alternative funding tool knowing that the covered bond fundamentals are laid down in a draft legislation.”

The country’s banks will then be able to issue bonds designated “pandbrieven” or “lettres de gage” in the draft.

Officials at some Belgian banks told The Covered Bond Report that much of the drafting of what they hope will become law occurred this May. The country’s banks then submitted – via a working group operating under the auspices of the Belgian banking association (Febelfin) – comments on the draft to NBB, which has yet to return a reviewed version to the working group.

“There is no confirmed timeline, but the central bank had indicated that it would probably not revert before the end of the summer,” said an official at one Belgian bank. “We hope that it will revert by late August/early September.”

An official at another Belgian bank said that it was “a bit out of our hands” how the legislative project advances.

The Covered Bond Report understands that in its feedback the Febelfin working group suggested only minor changes to the proposed law, on which there is general agreement.

Once the NBB gets back to the banks with a reviewed version of the law it will be sent to the finance ministry and the European Central Bank, and thereafter to Belgium’s parliament. The supreme administrative court (Conseil d’État/Raad van State) will also need to pass judgement on the law.

In its prevailing form, which Dexia’s analysts noted may change, the draft framework provides for a structure based on issuance by universal credit institutions that will need to be licensed as covered bond banks by the NBB, as will be the case for individual programmes, too.

A cap on issuance does not appear to have been set, with Dexia’s analysts only referring to the possibility that the NBB might decide a limit on a case-by-case basis. An official at one of the Belgian banks confirmed that the NBB would have full discretion in this context.

The draft law also provides for the segregation of assets into two separate estates for covered bond issuers, with a general one containing assets of the issuer to which all creditors have direct recourse, and a segregated estate comprising the cover pool. Any initiation of insolvency proceeding will not affect the assets recorded in the segregated legal estate, according to the Dexia analysts.

They noted that the draft law is inspired by the German Pfandbrief Act, with common elements including direct issuance from the balance sheet, a cover asset register, a 180 day liquidity rule, and a separate programme for different asset classes.

However, in contrast to the Pfandbrief Act, the draft Belgian legislation accepts securitisations as cover pool assets under certain conditions, such as 90% of the pool underlying the securitisation being directly eligible for covered bonds and originated by a group-related entity of the issuer.

In addition, while Germany’s Pfandbrief banks do not have to set up separate programmes for commercial and residential mortgages, the draft Belgian legislation foresees this being the case for Belgian banks.

Another aspect of the draft legislation highlighted by Dexia’s analysts is that it provides for covered bonds being compliant with Ucits 52 (4) and the Capital Requirements Directive. However, they note that a distinction is made at programme level between CRD-compliant covered bonds, i.e. Belgian pandbrieven/lettres de gage, and non CRD-compliant covered bonds, simply called Belgian covered bonds.

“The denomination of both terms [pandbrieven/lettres de gage and covered bonds] is protected by law,” said the analysts. “These distinct types of covered bonds will appear on two separate lists. However the way that the law and the Royal Decree are stipulated, assures that in practice the Belgian credit institutions will only be able to issue CRD-compliant covered bonds.”

One of the banking officials also highlighted to The Covered Bond Report as important a revindication right enshrined in the draft law, which legally protects cashflows from the cover pool assets.

“Under Belgian law in general it is very difficult to segregate cashflows, which fall under the general estate,” he said, “but this particular rule gives noteholders the necessary title to the cash.”

He also drew attention to provisions in the draft that ensure that following bankruptcy of the issuer the cover pool will maintain a banking licence; Dexia’s analysts described this as the separate legal estate maintaining a (limited and extinguishing) banking licence.