Moody’s highlighted strengths and weaknesses of the Slovak covered bond framework in an analysis on Monday, two weeks after Všeobecná úverová banka (VUB) had successfully issued the first euro benchmark from the country and ahead of further anticipated supply.

The analysis is one of a series the rating agency has conducted taking an in-depth look at various countries’ legal frameworks, and in a chart summarising the results of these, Slovakia ranked 12th out of 18 jurisdictions, between Norway and the UK.

However, the new jurisdiction ranked 17th when also taking into account market practices, which may occur in a significant proportion of programmes in a country but not be universal.

“Our individual programme research describes programme-specific structure and practice,” Moody’s explained. “We may update this report from time to time as the covered bond framework in Slovakia evolves.

“We may also update our scores as we review our benchmarking of strong, average and weak features across all legal frameworks.”

Among strengths highlighted by Moody’s were: limiting primary cover pool assets to residential mortgage loans secured by property in Slovakia; the law’s mandated covered bond maturity extension periods, potentially for up to two years, that reduce refinancing risk; and a liquidity coverage test that requires coverage of any cumulative liquidity shortfalls in interest and principal on the covered bonds over a rolling 180 days.

“One of the key strengths of Slovakia’s legal framework for covered bonds is that eligibility criteria restrict primary cover pool assets to residential mortgage loans made to consumers,” said Tomas Rodriguez-Vigil, a Moody’s analyst.

“In addition, foreign assets in the cover pools are restricted and liquidity for covered bonds is provided under a specific test.”

One weakness, according to the rating agency, is the lack of specific requirements for frequent tests to manage interest rate and currency risks, despite annual stress testing – although Moody’s said Slovak issuance is likely to be in euros.

Another is cover pool exposure to set-off, due to set-off in Slovakia – in contrast to other countries – operating on a net basis, whereby borrowers would set off mortgage loan obligations against their bank deposits before claiming only the difference from the deposit guarantee scheme.