Covered bonds are set to be introduced in Estonia after the Estonian Ministry of Finance said yesterday (Wednesday) that it will draft a covered bonds act to create a legal framework allowing banks to use the instrument.

“Covered bonds have not been issued in Estonia yet,” said Estonian finance minister Sven Sester (pictured). “A well-functioning covered bond market would give a boost to the Estonian securities market and improve the financing options of companies.

“Broader investment and financing options would in their turn support economic growth and the creation of new jobs.”

The ministry said that banks operating in Estonia had shown an interest in issuing covered bonds as an additional source of finance that could help reduce mortgage finance costs.

The Estonian Banking Association (Eesti Pangaliit) last year worked on proposed covered bond legislation to present to the ministry.

“From the issuer’s perspective it would be good to have a solid legal framework in place, as that would create the possibility to issue covered bonds whenever market conditions are favourable,” the head of the association’s covered bond working group told The CBR early last year. “From the investor’s perspective, there are not many options to take Estonian risk into portfolios as we don’t have government bonds either.”

The Estonian mortgage market is dominated by subsidiaries of Nordic banks, such as Swedbank, SEB, Nordea and Danske.

Please click here for last year’s Q&A with Eesti Pangaliit.