The Belgian government set an 8% cap on the proportion of a bank’s assets that can be encumbered through covered bond issuance on Friday in a move that surprised market participants and will restrict the volume of supply from the new jurisdiction.

The limit was announced as part of a Royal Decree project approved by the government that is one of the final steps in completing Belgium’s framework. The Royal Decree is expected to be finalised in the next week or two.

Preparations for the first Belgian issuance are well underway, with issuance from Belfius (formerly Dexia Belgium) and KBC considered possible by year-end, given that the Belgian parliament accelerated moves to enact legislation ahead of the summer break and with a generally supportive environment.

Friday’s move came as a surprise to market participants, with a funding official at one likely issuer saying there were no discussions with Belgium’s banks despite there have been a long process leading up to the establishment of the covered bond framework.

“We have a Royal Decree now, which is good,” he said. “On the other hand, at the last minute and without consulting us they added this cap of 8% on Friday,” he said. “I guess it is politically motivated and has to do with the protection of deposit holders.”

The cap limits the amount of registered cover assets at the time of issue to 8% of a bank’s total assets, although the funding official said that it is not yet clear just how this will be calculated. Another banker said that it would be interesting to see whether, as in Australia, the denominator is restricted to assets within the country and excludes international assets, noting that a large share of KBC assets are international.

The limit will not stifle the birth of the market, however.

“It will put a limit on how much covered bonds can be issued,” said the funding official, “but for us it is still a significant amount.

“As an alternative funding tool it will still be OK. “

And Bernd Volk, head of covered bond research at Deutsche Bank, said that such a limit should help Belgian issuers in tapping the market.

Limits on covered bond issuance in relation to a financial institution’s assets have become common in new jurisdictions, although these have mostly been outside Europe in countries such as Australia, Canada and New Zealand.

“Interestingly, new countries come up with such issuance limits while traditional covered bond countries ignore this topic or have bilateral limits for issuers which are not public (e.g. the UK and Netherlands),” said Volk.

“Some countries, e.g. Denmark, simply cannot come up with such limits as funding is based in covered bonds, i.e. covered bonds are a business model and not only a funding tool.”

However, with Belgium being one of the only continental European jurisdictions without prior covered bond legislation, it was in a position to introduce a limit. The UK was the first country to introduce such a cap, but moved away from hard limits as the market developed.

A second Royal Decree, relating to the cover pool administrator, still needs to be implemented before the Belgian framework is finalised, while the National Bank of Belgium has to issue detailed rules on issuance.