The Bank of Spain is discussing making changes to Spain’s covered bond model to align it with those of other European countries, according to sources, with the asset encumbrance implications of cédulas being backed by banks’ entire mortgage books a key driver.

The discussions are taking place between the central bank, the Spanish Mortgage Association and cédulas issuers, said a market participant, and are about possible amendments to the covered bond issuance model in Spain to bring it closer to the standards in place in Germany and France.

The discussions were reported by Spanish newspaper Expansión on Saturday. An official at the Bank of Spain today (Monday) told The Covered Bond Report that it had no official comment to make.

Spanish financial institutions mainly issue law-based covered bonds called cédulas hipotecarias. These are unique among covered bonds issued out of other developed economies in that they provide investors with a preferential claim on an issuer’s entire mortgage book rather than on a portfolio of assets earmarked for this purpose – a cover pool. This has the effect of increasing asset encumbrance, which has become an important focus for regulators and market participants given plans to make senior unsecured bondholders take losses to help rescue failing banks.

The aforementioned market participant said that having covered bonds backed by the whole mortgage book is “absurd” from an asset encumbrance perspective, and that asset encumbrance concerns would be playing a large role in fuelling the discussions.

He welcomed the prospect of changes being made to the covered bond issuance model in Spain, and not just because of the asset encumbrance issue.

“I hope it is a big review and that it doesn’t end up in nothing,” he said. “I hope it ends up being a change in the model that places us with other European legislation. I don’t want to be different.”

He stressed that the discussions would be about improving the existing framework in Spain, and that outstanding cédulas would not be “left behind” by any changes, with the Bank of Spain studying how a transition to a different model could be made.

He said that aspects being looked at include the introduction of a cover pool administrator separate from the role of overall insolvency administrator for the bank, and the creation of an entity that would be responsible for providing and raising liquidity in the event of an issuer default, with access to European Central Bank repo facilities, for example similar to arrangements under the German Pfandbrief Act.

The cédulas framework does not provide for a cover pool monitor, and the insolvency administrators of the issuer are also responsible for the covered bond programme.

Spanish banks also have the possibility to issue another type of covered bond besides cédulas – bonos hipotecarios – and although they have not hitherto done so, a funding official at an issuer said that the Bank of Spain “might try to revive” the instrument.

In contrast to cédulas, bonos hipotecarios are guaranteed only by specific mortgage loans attached to the bonds’ issuance.

“They are much closer to the concept of covered bonds than cédulas,” said the banker. “Bonos hipotecarios could be middle ground between cédulas and securitisation. It would be a nice compromise and a pity not to have the bonos hipotecarios idea developed.”

Benefits of bonos hipotecarios would include lower asset encumbrance and greater transparency, he said.

However, he stressed that his impression was that discussions were in the very early stages and that any moves would not be quick.