Romanian government draft covered bond legislation is credit positive because it reduces collateral and refinancing risk, according to Moody’s, and will also help the country’s banks expand their funding sources and increase mortgage lending.

National Bank of Romania, Bucharest

The draft legislation, if enacted, will revise Romania’s Mortgage Bonds Law of March 2006 and strengthen the legal framework for covered bonds, Moody’s said yesterday (Tuesday), with the government moving to open up the market for mortgage-backed covered bonds.

“The Romanian banks will likely benefit from a successful implementation of the law in the long term because it will allow them to diversify and extend their funding sources,” said Armen Dallakyan, senior analyst at Moody’s. “An active covered bonds market will also help banks increase mortgage lending and as a result improve their revenue generation.”

The rating agency said that it regards the draft legislation as credit positive, particularly in addressing collateral risk and mitigating refinancing risk. However, it said that covered bond investors could be exposed to significant currency risk if no effective hedging arrangements are in place.

“We expect that Romanian covered bonds would be exempted from bail-in in application of the Bank Recovery & Resolution Directive and benefit accordingly, like covered bonds in other countries of the European Union,” said Alexander Zeidler, senior analyst at Moody’s.