Romanian efforts to lay the foundations for covered bond issuance in the country are concentrating on finalising a legal framework for a mortgage covered bonds after the central bank at the end of October recommended this version of the funding instrument should be prioritised.

National Bank of Romania, Bucharest

Romania has had a mortgage bond law in place since March 2006, but there has been no issuance under it. A working group was established under the umbrella of the Romanian Banking Association in the first half of 2010 to improve the legal framework for issuing covered bonds, after an overhauled pension system paved the way for private pension funds in the jurisdiction to start investing more.

Irina Neacsu, head of debt capital market at Banca Comercială Română, who sits on the working group, told The Covered Bond Report that the working group initially worked on updating the legislation to provide for mortgage and public sector covered bond issuance, but that the National Bank of Romania (the central bank), at the end of October recommended its focus be on mortgage covered bonds for the start.

“We need to be in line with their recommendations, so we are now working on an update of the legal framework for mortgage covered bonds only,” she said. “If the market responds well to the first mortgage covered bonds then we can start working on the public sector framework.”

The working group is close to reaching an agreement with the regulatory authorities, said Neacsu, with the ministry of finance and securities commission satisfied with the working group’s proposals, while at the central bank level there have been some technical issues to be clarified.

Overall, these institutions appear supportive towards the introduction of covered bonds, she added, with local banks eager to have a legal framework in place to be able to start working on programmes.

UniCredit Ţiriac Bank, for example, has already indicated that it would be interested in issuing covered bonds, although it is “not desperate to”. (See here for previous coverage.)

Regarding the timing and method of implementation of the updated covered bond framework, Neacsu said that the decision should be taken by the responsible authorities once the final draft of the covered bond law is agreed by all parties involved in the process.

Romania has parliamentary elections on 9 December.

In a 2012 financial stability report released on 8 November, National Bank of Romania said that the implementation of a covered bond regulatory framework should keep into account several goals, such as fostering domestic currency lending by developing a local capital market, and ensuring development of portfolios of very low risk assets to collateralise covered bonds. This, it said, is a challenge in the context of the evolution of the quality of mortgage-backed lending in Romania.

“The further deterioration in the quality of the portfolio of mortgage-backed loans to households and companies, in the context of large shares of these exposures in banks’ balance sheets and the ongoing corrective trend in the value of real estate assets, is the main vulnerability associated with the real estate sector,” it said.