The potential of Slovakia’s covered bond market may be unlocked by a new “world class” law set to enter into force on 1 January and signed by the president yesterday (Thursday), with the Slovak finance ministry highlighting to The CBR increased investor protection, transparency and supervision.

The Slovak Ministry of Finance and the National Bank of Slovakia have been working on an update to the country’s covered bond legislation for some time, with assistance from the European Bank for Reconstruction & Development (EBRD).

The Ministry of Finance released proposed updates to the covered bond law for a public consultation in July, and on 17 October the proposed changes were approved by Slovakia’s parliament.

The act was then signed by president Andrej Kiska (pictured, left) yesterday, and will now be published in the Collection of Laws. The law will come into effect on 1 January 2018.

Slovakia’s existing covered bond law stems from 1990 and has many idiosyncrasies, and as a result the country’s covered bond market has remained relatively small, in spite of growing funding needs for Slovak banks.

“The reasons for changing the covered bonds legislation were several: suggestions from banks, the mortgage bond market situation, new liquidity and capital requirements regulation, EBA recommendations, the growing need for long-term financing in the Slovak banking sector and the growing share of housing loans,” Alexandra Gogová, spokeswoman at the Ministry of Finance of the Slovak Republic, told The CBR.

Gogová said it was because of these reasons that the relevant authorities decided to update the Slovak framework now, rather than wait for the introduction of an expected EU-wide harmonised covered bond framework.

When work began on redrafting the law, the existing covered bond framework complied with only six out of 17 covered bond best practices as defined by the European Banking Authority (EBA), according to Jacek Kubas, principal, local currency and capital markets department at the EBRD, but after the reform the law should comply with 11-12 best practices.

“That was the focus of this reform effort, to take this law from the 1990s and get it more in line with current international standards,” he said. “All of these changes will make this law world class in the covered bond sphere, making it more competitive and more usable for issuers, and making the Slovak product more investor-friendly.”

Gogová highlighted as being the key changes introduced in the new law: a significant widening of permissible underlying assets; an adjustment of bankruptcy law rules to increase investor protection; and improvements concerning transparency and supervision.

The new law will, for example, remove the automatic acceleration of covered bonds in the event of insolvency proceedings against an issuer, which has resulted in caps on Slovak covered bond ratings.

The idiosyncrasies of the 1990 law also include a requirement that 90% of all mortgage loans be financed by covered bonds, forcing banks to issue regularly and in small amounts, meaning issuance typically cannot qualify for preferential treatment as even Level 2 assets in LCRs – for which they must be at least Eu250m – and restrictions on eligible collateral. This ratio was lowered to 70% by the National Bank of Slovakia, but banks still often chose to provide customers so-called “housing loans” – consumer loans that can be funded by deposits – rather than mortgages.

The refinancing ratio will be removed by the new law, meaning banks can issue covered bonds at their own pace, said Kubas, allowing for growth in both the covered bond market and the mortgage market.

The largest covered bonds issued out of Slovakia to date are two Eu250m issues, sold by Všeobecná úverová banka (VÚB) via American auctions in January and August.

“I don’t think there will be a lot of benchmark-sized issuances – hopefully I will be proved wrong – but with the law in place I think there could be a lot more Eu250m sub-benchmarks,” said Kubas. “Slovakia is of course a euro area country, so if they are going to issue in euros and attract international investors, they will not have to put a currency swap into their structures, unlike the Poles had to, for example.

“I really think there is a lot of potential for covered bonds in Slovakia.”

Other banks are also expected to join VÚB in issuing sub-benchmarks.

“We believe that this change of legislation will contribute to the stability of banks’ financing in the provision of mortgage loans and the development of the Slovak capital market, and will strengthen the protection and legal certainty of investors,” said Gogová.

Photo: European Parliament; Copyright EU