A new Lithuanian covered bond framework could be adopted as soon as early 2018, after the Ministry of Finance last Tuesday published an EBRD discussion paper in preparation for the drafting of legislation to replace the country’s existing but outdated law.

The concept paper was prepared by the European Bank for Reconstruction & Development (EBRD) – in cooperation with local law firm Sorainen and consultant Richard Kemmish – to identify issues that need to be addressed in order to introduce covered bonds and securitisations in Lithuania, and provide a roadmap for the redrafting of relevant laws.

Following the publication of the paper, the EBRD said it will seek feedback from stakeholders and that the next step will be the drafting of primary legislation, both for covered bonds and securitisations. Secondary regulations will then be required from the National Bank of Lithuania to further clarify the legal and supervisory framework.

Jacek Kubas, principal, local currency and capital markets department at the EBRD, told The Covered Bond Report that the draft framework is intended to be finalised this year and then submitted for parliamentary approval.

“We hope to present to the parliament this year, but the parliamentary process takes time, so I would think the draft will be adopted in early 2018 and then enter into force,” he said. “But one – as it is with legal reform projects – can never be 100% certain in terms of timing.”

Kubas said the amendments will, in addition to introducing a securitisation framework, bring the Lithuanian covered bond law into line with international best practices and EBA recommendations.

“The existing covered bond law is quite outdated and has a number of deficiencies,” he said. “Furthermore, there has only been one covered bond issued under the existing law.”

The Ministry of Finance (Finansų ministerija) said the project is part of the government’s plan to develop Lithuanian capital markets and extend the range of funding sources available to banks and products available to investors.

The concept paper said that in Lithuania the development of a functioning covered bond market would increase the stability of the financial system by reducing heavy reliance on short term deposits and enabling Lithuanian banks to fund themselves independently from their non-Lithuanian parent companies.

The paper noted that key decisions must be made on issues such as whether to allow only residential mortgages to be used as covered bond collateral or to also allow commercial mortgages and public sector issuance, and recommended that Lithuanian covered bonds be issued through a “separate guarantor” model used in countries such as the UK and the Netherlands.

Photo credit: Ministy of Finance of the Republic of Lithuania