European covered bonds must comply with the legislative package for the harmonization of EU covered bond frameworks (EU Covered Bond Directive and updated Article 129 of the Capital Requirements Regulation [CRR]) from July 8, 2022, or risk losing their preferential regulatory treatment.

S&P Global Ratings understands that all EU member states have now implemented the EU Covered Bond Directive into their national laws, this represents significant progress since the European Commission (EC) stated on June 2, 2022, that 70% of countries had fully complied. Once fully implemented, we consider that the transposition of the directive is credit positive for covered bonds and we don't expect any negative rating impact due to delays in the transposition process.

We also do not expect the changes to significantly affect our previous analysis of the legal frameworks for covered bond programs that we rate. However, due to ongoing uncertainty in some national laws as to how the issuer's liquidity coverage ratio (LCR) and maturity extensions will be treated when addressing the covered bond-related 180 days' liquidity requirement, we have not yet changed our existing liquidity coverage assumptions. Furthermore, the grandfathering provisions differ from country to country, which will mean that some issuers must cover liquidity for existing bonds, while others will remain grandfathered under prior laws.

The implementation of new laws may affect our legislative framework assessment under the jurisdictional support assessment in our covered bonds criteria. However, we do not expect such a change to change our overall jurisdictional support assessments (see "Sector And Industry Variables: Covered Bonds Criteria," published on Dec. 17, 2021).

Although significant progress has been made since July 2021 when we published our last update on the harmonization journey, work on covered bond legislation in most EU countries has been delayed. We believe some issuers may face challenges to issue new European covered bonds immediately following the July 8 deadline. We understand that additional work remains in some jurisdictions to fully clarify the details of their implementing laws, and we further understand that many issuers, including those in jurisdictions that have fully transposed the directive into national law, have struggled to introduce new reporting systems and update program documentation in time.

There has been some speculation that issuers have been frontloading issuance ahead of the deadline to avoid issues related to the updated reporting systems and documentation. A lack of secondary legislation and required reporting systems means that although existing bonds will be grandfathered and not lose their designation, new issuance may face initial delays, in our view.

To our knowledge, all EU countries have passed the necessary primary legislation, but some have yet to clarify relevant secondary legislation. Nevertheless, the EU directive has achieved a major milestone by introducing in a single law, the definition and description of a European covered bond that previously was addressed in several laws. The following section provides high level observations of how those EU jurisdictions in which we rate covered bonds have implemented the directive into national law.

Table 1

Austria

On Dec. 10, 2021, Austria's new covered bond law implementing the EU Covered Bond Directive was published. The law merges Austria's three covered bond laws into one aligned with the EU harmonization directive. The main amendments to the existing laws relate to an increase in the eligible loan-to-value (LTV) ratio, nominal overcollateralization requirements, the introduction of 180 days' liquidity coverage, joint funding, and rules for the extension of maturities.

The additional 180 days' liquidity coverage might increase the available credit enhancement for some Austrian covered bonds, and release further rating uplift. Covered bonds issued before July 8, 2022 will be grandfathered i.e., they may continue to comply with the old regulatory framework until their maturity. All covered bonds issued after July 7, 2022 will be subject to the new legislation. We do not expect the law to affect our current ratings on Austrian covered bonds, however, the merger of three laws does require additional work.

Belgium

The law transposing the EU Covered Bond Directive into national law was approved on Nov. 26, 2021, and the amendments entered into force on July 8, 2022. The updated legislation brings some relatively minor changes as the existing framework was already aligned with the requirements of the directive.

The main amendments to the existing laws relate to extension conditions for soft-bullet bonds administered by the cover pool administrator if a liquidation or resolution procedure has been initiated. We understand existing extension term bonds will be adjusted to align with the new law. Furthermore, the current limit on covered bond issuance will be abolished from Jan. 1, 2024, although the National Bank of Belgium can impose a limit to protect creditors' rights. Until July 8, 2022 the limit was 8% of the bank's assets unless a temporary exclusion had been granted to the bank.

We do not expect the law to affect our current ratings on Belgian covered bonds as we consider 180 days' liquidity to be covered for most Belgian covered bonds.

Denmark

In 2021 Denmark completed the parliamentary procedure for implementation of the EU Covered Bond Directive into its covered bond legislation. The amendments to the affected law were published in more detail on March 16, 2022, and all secondary legislation has been finalized and is in effect from July 8, 2022. The main amendments to the existing law relate to a nominal overcollateralization minimum, the introduction of 180 days' liquidity coverage, and clarification of existing rules for extensions and joint funding.

Realkreditobligationer (RO) will be grandfathered unless issuance continues. In such case the ROs must comply with updated valuation rules and will be labeled as European covered bonds. European style saerligt daekkede obligation (SDO) issuance must introduce new objective extension triggers for new issuance, and already outstanding covered bonds will be considered in the 180 days' liquidity calculation without extensions, which may increase liquidity requirements. We do not expect the law to affect our current ratings on Danish covered bonds as we consider 180 days' liquidity to be covered for most Danish covered bonds.

Finland

Finland implemented the Covered Bond Directive into national legislation via the Covered Bond Act (the CBA). The CBA entered into force on March 11, 2022, and will apply from July 8, 2022. The CBA will replace the Finnish Act on Mortgage Credit Bank Activity (the MCBA). The main amendments to the existing law relate to increases in the eligible LTV ratio, a nominal overcollateralization requirement of 2% or 5% on a net present value (NPV) basis if certain requirements of Article 129 of the CRR are not fulfilled, the introduction of 180 days' liquidity coverage, and formal rules for maturity extensions and joint funding.

We understand that existing bonds will be grandfathered but considered without extension in 180 days' liquidity calculations. We understand that issuers are taking different approaches, including amending terms and conditions to avoid increased liquidity requirements. We do not expect the law to affect our current ratings.

France

The EU Covered Bond Directive has been transposed into French legislation by enacting changes to the French Monetary and Financial Code on June 30, 2021, and further decrees. These amendments will apply as of July 8, 2022. The main amendments to the existing law relate to the requirement for issuers to cover 180 days of liquidity as is the case currently. However, issuers will need to meet their liquidity needs will have to be met by posting LCR eligible assets.

The legislation specifies the conditions for the maturity extension of soft-bullet bonds upon the issuer's insolvency. Mixing soft-bullet bonds with existing hard-bullet bonds may make it difficult for issuers to issue soft-bullet bonds without changing investor rankings, in our view. Premium covered bonds will require enhanced monitoring activity by the asset monitor. We do not expect the law to affect our current ratings.

Germany

On April 15, 2021, the German Bundestag passed the Covered Bonds Directive Implementation Act, and on July 8, 2021, it transposed the EU Covered Bond Directive into the covered bond law. The amended law will apply to both new and existing covered bonds. The main amendments to the existing law relate to the introduction of a nominal overcollateralization requirement of 2% and the introduction of soft-bullet mechanisms for all outstanding bonds. The new soft-bullet structure will not be considered in the requirement for issuers to cover 180 days of liquidity and requires the issuer to maintain the current payment sequence of outstanding covered bonds.

We consider the extended maturity date in our analysis which may improve asset-liability mismatch going forward. The law clarifies the responsibilities of the administrator and requires disclosure maturity extension triggers. We do not expect the law to affect our current ratings.

Greece

In April 2022 the Greek covered bond law was amended to transpose the EU Covered Bond Directive into national law. The changes affect only covered bonds issued after July 8, 2022. The main amendments to the law relate to the introduction of a 180-day liquidity buffer. This has no material impact on our analysis since the programs we rate have a conditional passthrough structure. Other changes introduce the possibility for issuers to use as collateral assets repurchased from other banks, and to buy assets from non-bank companies.

We understand that the Bank of Greece Act will be amended in September 2022, thereby finalizing the regulatory landscape for Greek covered bonds.

Iceland

Iceland has indicated its intention to transpose the EU Covered Bond Directive into its national law by the end of 2022 or the beginning of 2023. It is currently unclear if and how the regulation will affect the small amount of outstanding euro covered bond issuance from Iceland.

Italy

On Nov. 5, 2021, the Italian covered bond law was amended to transpose the EU Covered Bond Directive into national law. The main amendments to the existing law relate to the introduction of a 180-day liquidity buffer covering net liquidity shortfalls which may consider the extendible covered bond maturity. The minimum legal overcollateralization requirement has not been raised from 0%, although the law allows the Bank of Italy to set a higher minimum requirement through supervisory instructions. We understand that secondary legislation is still pending but do not expect the amended law to affect our current ratings.

Ireland

Ireland transposed the EU Covered Bond Directive into Irish law on Nov. 3, 2021. The regulations came into effect on July 8, 2022 and will apply to covered bonds issued from that date onward. The main amendments to the existing law relate to the calculation and reporting requirements for a 180-day liquidity buffer. These additional requirements are layered on top of existing overcollateralization requirements and include expected maintenance and administration costs for the winding-down of a covered bond program.

We do not expect the law to affect our current ratings on Irish covered bonds as we already consider 180 days' liquidity to be covered for most Irish covered bonds.

The Netherlands

The legislation to transpose the EU Covered Bond Directive into Dutch law includes a new law and a new decree published on June 13, 2022. It became effective on July 8, 2022 and will apply to covered bonds issued from that date onward. The amendments to the framework are essentially refinements of existing concepts, including clarifications of the conditions for extending the maturities of soft-bullet covered bonds.

Since the Dutch legislation is already aligned with the EU Directive on fundamental aspects, the scope of updates is limited, and we do not expect the law to affect our current ratings.

Norway

Norway published new legislation at the end of June following European Economic Area (EEA) ratification of the EU Covered Bond Directive. The amended law is effective as of July 8, 2022. The main amendments to the existing law relate to an increase in overcollateralization to 5%, the 180 days' liquidity coverage requirement, and the introduction of conditions for the maturity extension of soft-bullet bonds. It remains unclear whether maturity extensions will in and of themselves cover the 180 days' liquidity requirement.

We do not expect the law to affect our current ratings on Norwegian covered bonds as we already consider 180 days' liquidity to be covered for most Norwegian covered bonds.

Spain

On Nov. 3, 2021, the Spanish government published a Royal Decree, which together with a subsequent decree published in June, transposes the EU Covered Bond Directive into Spanish law. The Royal Decrees entered into force on July 8, 2022, replacing existing Spanish covered bond laws. The adoption of the new legislation represents significant structural changes to the existing Spanish covered bond legislation, which currently comprises several laws and different frameworks for different types of covered bonds.

Under the new law, all types of covered bonds will be governed by a single legal framework. The minimum overcollateralization requirement will be 5% and soft-bullet structures will be introduced. In our view, the law represents a positive step as it will increase transparency and comparability of Spanish covered bonds to covered bonds issued in other jurisdictions. We understand that secondary legislation is still pending but do not expect the law to affect our current ratings.

Sweden

On June 1, 2022, the Swedish government published a final amended law to align the covered bond law with the EU harmonization directive. The main proposed amendments relate to LTV ratio requirements, overcollateralization, the introduction of 180 days' liquidity coverage, and clarification of extension rules.

The extension rules will be allowed to avoid the issuer's default but will not be available for an insolvency administrator. We understand that the extensions will also be considered for the regulatory 180 days' liquidity coverage requirement, which will only apply to bonds issued after July 8, 2022. Transition rules allow issuers to continue to tap existing series up to a defined limit.

We do not expect the proposal to affect our current ratings. The additional coverage of 180 days' liquidity is unlikely to cover our consideration of 180 days' liquidity risk as it does not consider grandfathered covered bonds.

Still To Come: Third-Country Equivalence Assessments And European Secured Notes

The European authorities decided to leave the equivalent treatment of covered bonds issued by non-EEA credit institutions outside the scope of the directive and regulation. Instead, the EC will examine the issue and produce a report to the Council and Parliament within two years after the deadline to transpose the directive into national law (2024). Within this same timeline, the Commission will assess the case for introducing European secured notes, a dual recourse instrument backed by riskier types of assets such as small to midsize enterprise loans.

Related Research

• Spanish Covered Bonds: Harmonization Achieved Through Royal Decree Law, July 12, 2022
• Sector And Industry Variables: Covered Bonds Criteria, Dec. 17, 2021
• Covered Bonds Outlook 2022: Performance Stable As Support Schemes Wind Down, Dec. 9, 2021
• Covered Bond Harmonization In The EU Remains A Work In Progress, July 13, 2021
• Austrian Covered Bonds Harmonization Proposal Merges Three Laws Into One, June 10, 2021
• Swedish Covered Bonds: Harmonization Plan Paves Way For Further Rating Uplift, Feb. 4, 2021
• Danish Covered Bonds: Proposal Outlines Harmonization Plan, Nov. 23, 2020
• German Covered Bonds: Harmonization In Sight, Oct. 29, 2020
• Harmonization Accomplished: A New European Covered Bond Framework, April 18, 2019
• S&P Global Ratings Comments On The Proposed Directive For European Covered Bonds, March 19, 2018