Specialists at the Belgian central bank and industry representatives have agreed on a covered bond legislative text, paving the path for the initiative to enter the political law-making process, according to market participants. A spin-off of Dexia Bank Belgium is seen by many as having likely created a further candidate for issuance.

Belgium’s banks, operating under the auspices of the Belgian Banking Association (Febelfin), and the National Bank of Belgium (NBB) have reached agreement on a legislative text after having over the summer settled some “small stuff”, according to a banker familiar with the initiative.

Dexia branch in West Flanders, Belgium

Another market participant said that there had been constructive cooperation between Febelfin and the legal and prudential departments of NBB, and that the latter had had time to review suggestions made by industry representatives as part of a consultation.

“Last week we received confirmation that the prudential and legal departments of the NBB had agreed on a final text, which should be presented to the finance cabinet with a view to launching the standard parliamentary procedure,” he said.

He said that he expected the central bank’s board of directors to approve the proposal soon, possibly this week, and that then “everything will be ready to start the formal process”.

The Covered Bond Report understands that the establishment of a covered bond legal framework in Belgium has political support, but that the timeline for parliamentary approval depends to a large extent on when a new government takes over from the prevailing caretaker one.

A market participant said it would be “tremendously difficult” to motivate the current finance minister to take all the steps required to get the legislation on the parliamentary agenda given efforts to establish a new government.

Belgium’s main political parties are moving towards forming a new government, with negotiations underway to agree a budget. Caretaker prime minister Yves Leterme is due to join the Organisation of Economic Co-operation & Development (OECD) as deputy secretary general before the end of this year, meaning that negotiations would need to be finalised by his departure.

“There have not been many difficulties to inform politics about the need for such a framework in Belgium as one of the few European countries not to have covered bond legislation,” said a Belgium-based market participant. “That’s why timing is the only question remaining.”

He said he presumed that the legislative proposal would be dealt with by the next government, but that this was still “a question mark”, and that legislation could either be passed before the end of this year or early next year.

A banker said that he understood that it was possible for the caretaker government to vote on the legislation and that “people are willing”, but that there were no guarantees and the matter was “out of our hands”.

A DCM official said that some Belgian banks expect the legislation to be approved before year-end while others think it could be delayed until the beginning of 2012.

The nationalisation of Dexia Bank Belgium as part of the dismantling of Dexia group is likely to have created a potential covered bond issuer, according to bankers and analysts.

“It’s a natural candidate,” said a covered bond analyst. “It’s now an isolated standalone Belgian bank with a domestic retail business.”

A banker familiar with the legislative project in Belgium said that Dexia was an active participant in discussions and was “always a big fan”, and that “now there is no French covered bond issuer it is all the more likely” that Dexia Bank Belgium would be a candidate for issuance.

“They were there from the start,” he said.

The covered bond analyst said that Belgian covered bond issuers may face challenging funding levels, however, because of where their sovereign trades.

OLOs trade in the range between UK covered bonds and cédulas hipotecarias, he said, with two year OLOs at around 100bp over swaps and eight years at around 180bp over.

A syndicate official questioned the logic of Belgian banks issuing covered bonds in the prevailing market environment given prevailing spread levels for Belgian government debt and sovereign volatility in general, and said that spreads for Belgian covered bonds would be “well north of 200bp over mid-swaps” for a five year maturity.

However, he said that balance sheet and business models are changing rapidly and that as these adjust the rationale for issuing covered bonds could become clearer as an alternative funding source for Belgian banks.

He suggested that the domestic banks such as KBC would drive the Belgian covered bond market. He considered issuance from a foreign owned bank such as BNP Paribas’ Fortis Bank less likely.

A banker close to Fortis said that any decision whether or not to issue covered bonds and how they might be marketed would have to take into account the impact such issuance could have on BNP Paribas’ French covered bonds – such as a cannibalisation of credit lines. The use of a programme for retained deals could be considered if it were deemed more efficient than RMBS or pledging public sector loans to the European Central Bank.