The National Bank of Belgium has been granted the power to allow Belgian banks to exceed in exceptional circumstances an 8% limit on assets encumbered by covered bond issuance in one of two Royal Decrees published yesterday (Thursday) that complete the country’s new law.

Belgian parliament

The 8% limit was announced by the Belgian council of ministers on 28 September, but – according to Johannes Rudolph, head of covered bond research at HSBC – before the Royal Decree dealing with this was finalised the text was reviewed by an expert council and amended.

The central bank has now been given the flexibility to allow banks to go beyond an 8% limit when they cannot access the senior unsecured market.

In French, the text reads:

Le projet de texte confère par ailleurs à la Banque Nationale de Belgique le pouvoir d’accorder des exemptions temporaires à l’application de la limite fixée par arrêté royal, dans des circonstances exceptionnelles et dûment justifiées telles que l’absence d’accès au marché de financement unsecured.

Market participants had been surprised and disappointed when the 8% limit was announced, but the Royal Decree shows more room for manoeuvre.

According to Rudolph, all that remains to be done before Belgian banks can issue is for the central bank to come up with some further rules and for potential issuers to apply for licences, a process that he said could take two to three months, meaning that issuance could happen from this December.

One Royal Decree deals with cover pool administrator and the other regulates asset-liability guidelines and quality requirements, said Rudolph, who highlighted these as main features of the second decree:

Geography: Mortgage loans in the EEA and public sector loans in OECD countries are eligible

Mortgage loans: Up to 15% of residential mortgage loans and no commercial mortgage loan on unfinished property can be part of the pool

Ordinary cover assets: Minimum 85% of outstanding covered bonds must be ordinary cover assets

Mortgage lending value: The cover asset amount is determined as the lower of (a) the loan amount, (b) 80% of the property value, (c) the amount of first-ranked mortgage rights. For commercial mortgage loans, the percentage is 60%

Loans in arrears: Loans with 30 day arrears will count 50% to cover pool calculation, unpaid loans get a zero value

Overcollateralisation: Must be 5% on a nominal basis

Risks: Liquidity risks for a six month horizon can be mitigated by external liquidity lines with certain “quality counterparts”. Specific tests on FX and interest rate risks must not be tested