A legal framework for covered bonds in Croatia could be with the country’s parliament by the end of this year, according to Bojan Fras of the Croatian National Bank, subject to delays related to EBA recommendations on market harmonisation, and, despite a lack of enthusiasm from “typical suspects”, some banks have expressed an interest in issuance.

Speaking at the 11th LBBW European Covered Bond Forum in Mainz yesterday (Thursday), Bojan Fras, vice governor at the Croatian National Bank (Hrvatska Narodna Banka, or HNB) said a draft covered bond law is in place.

“The process has been a little bit stalled by the EBA recommendations that were published in December, and we are waiting to see in what direction these recommendations will formalise – whether it will end up in some sort of European directive or in some other way,” said Fras.

“Anyway, the EBA recommendations are largely included into the current draft law, and should it become clear in a not too long period how the EBA recommendation will be formalised, it is feasible to have the law in the parliament by the end of the current year.”

However, Fras said that Croatian banks are not yet “at the starting blocks” in terms of being ready to issue covered bonds.

He said there are many reasons for this, including that the Croatian economy has been going through a record-long recession of six years – although it has been recovering over the past year – and that Croatian banks have limited need for covered bond funding, with demand for credit, although improved, still relatively low and liquidity very high.

“The banks who would be the typical suspects for the first issues of covered bonds don’t feel the necessary motivation because the liquidity is already there for them,” Fras said.

He added that that appetite for covered bond issuance may improve by the time the legislation is passed.

The European Bank for Reconstruction & Development (EBRD) has been assisting the Croatian Ministry of Finance in drafting the framework, with the HNB and also market regulator HANFNA closely involved. The EBRD has similarly worked on the development of covered bond markets in countries such as Poland, Turkey and Romania.

“Some of those jurisdictions had very successful issues following that assistance,” said Fras.

Fras noted that when assisting local governments on such projects, the EBRD assesses the interest in covered bond issuance among domestic banks and investors.

“There was no euphoric response to that market assessment in Croatia from the banks,” he said, “but the interesting thing is that out of the banks they interviewed, some of the large banks expressed their interest in the covered bond product.”

Fras said interest from investors may also develop over time. Asked by panel moderator Marc Just of LBBW if the HNB would also invest in Croatian covered bonds, he said that the central bank has strict regulations restricting its investments, but noted that it does invest in German Pfandbriefe.

Fras also noted that in some cases, the EBRD has also committed to investing in initial issuances in new covered bond jurisdictions. The EBRD has most recently begun investing in covered bonds from Slovakia and Hungary.

Jacek Kubas, principal, local currency and capital markets department at the EBRD, told The Covered Bond Report that it is working with the ministry of finance because it sees the potential for the development of the Croatian market, including “possible future investments by EBRD”.

He noted that in Poland the EBRD worked on the development of the law and then followed this with investments.

“That is the pattern we hope to follow in other countries where we do covered bond reforms,” he said.

Photo: Bojan Fras speaking at 11th LBBW European Covered Bond Forum