A unification of Austria’s three covered bond laws into a single legislative framework is being targeted by next year, with industry representatives set to complete a draft by the end of June, in a move welcomed by analysts against a backdrop of wider harmonisation of the product.

At present, different types of Austrian financial institutions issue covered bonds under one of three pieces of covered bond legislation, which, while strongly aligned, differ on aspects such as OC levels and LTV ratios. The three are: the Mortgage Bank Act (Hypothekenbankgesetz), used by Erste Group and UniCredit Bank Austria; the Law Regarding Secured Bank Bonds (Gesetz betreffend fundierte Bankschuldverschreibungen), used by cooperatives; and the Pfandbrief Act (Pfandbriefgesetz), used by Landeshypothekenbanken.

Moves towards creating a uniform law have long been discussed, but on Friday of last week (21 April), the Austrian Federal Economic Chamber (WKÖ) announced that the bank and insurance division of the WKÖ and stakeholders including five associations of the banking industry and representatives of the major banks and institutions authorised to issue Pfandbriefe have agreed to revise Austria’s legal framework for covered bonds, to be in a “cleaner and more coherent state”.

It said the key points of the new legislation should be that all credit institutions that meet the legal requirements should have the option of issuing covered bonds, and that any European specifications, from the European Commission and the European Banking Authority (EBA), should be taken into consideration. It added that “the liquidity aspect” and “procedural issues” should be taken into account. It is also understood to take into account the Bank Recovery & Resolution Directive (BRRD).

The WKÖ said its bank and insurance division and Pfandbrief Forum Austria have jointly set up a working structure and that a competent advisor who is familiar with the legislative requirements is contracted to update a 2012 draft. A draft version of the framework, agreed within the banking industry, will be completed by the of June, and subsequently entered into the review process.

“The Federal Ministry of Finance has promised to adopt into law a statute that meets the above-referenced requirements with a view to ensuring entry into force on 1 January 2018,” the WKÖ said.

Moody’s deemed the initiative credit positive, saying it affirms the authorities’ commitment to the funding instrument for Austrian banks.

“We also anticipate that the new law will clarify how covered bonds will be treated in a bank resolution scenario,” the rating agency said. “This is an important consideration in our analysis, in particular of small banks’ covered bonds, as insolvent liquidation proceedings are credit negative for banks’ covered bonds. In contrast, resolution tools can be used to keep covered bonds in a going concern entity, supporting the continuity of covered bond payments.”

Analysts also welcomed the move.

“We view an update that brings Austria’s legal framework for covered bonds, last reformed in 2005, in line with current best practice as positive,” said Franz Rudolf, head of financials credit research at UniCredit. “In addition, a single covered bond law compared to the currently three legal frameworks could provide further positive momentum to the Austrian market.”

Some Eu45bn of Austrian covered bonds are outstanding, according to Rudolf, almost half or which is in benchmark format issued by 10 of an overall 24 Austrian issuers.

Chart source: UniCredit; Photo source: Bundesministerium für Finanzen (BMF)