articles Ratings /ratings/en/research/articles/210713-covered-bond-harmonization-in-the-eu-remains-a-work-in-progress-12030317 content esgSubNav
In This List

Covered Bond Harmonization In The EU Remains A Work in Progress


After Going Places It's Never Been, CMBS Lodging Is Back On The Road Again


European CMBS Monitor Q3 2021


Summary: Barclays Capital Inc./FMSbonds Inc. (Series 2021-XF2953TX); Tender Option Certificates/Bonds


U.S. BSL CLO Top Obligors And Industries Report: Third-Quarter 2021

Covered Bond Harmonization In The EU Remains A Work in Progress


It's been years in the works, but the EU's covered bond directive is now becoming law in countries within the region. Once accomplished, S&P Global Ratings believes it will represent an important first step in creating a more level playing field for covered bonds in Europe. What's more, it will help cover liquidity risk and enhance the comparability of covered bonds across jurisdictions.

The legislative package for the harmonization of EU covered bond frameworks entered into force in January 2020. Despite a relatively long period for transposition into national law, some member states are past the deadline of July 8, 2021. To date, only Germany, France, Denmark, and Latvia have enacted the law.

The COVID-19 crisis delayed the process in a number of countries. At the same time, the transposition into law of certain elements, such as provisions on extendible maturities and the calculation of liquidity buffers, has proven difficult. That's because the directive is principles-based, leaving greater room for interpretation at the national level.


The EU directive establishes a common definition of covered bonds, defines their structural features, and clarifies the responsibilities for supervision of these financial instruments. It also amends the EU's Capital Requirements Regulation (CRR) of 2013 with the aim of tightening the conditions for granting preferential capital treatment. The new legislation will come into force in July 2022.

By establishing a covered bond "brand," the framework endorses covered bonds as a crucial funding tool for financial institutions in the EU. Despite the challenges of transposing the EU framework into local law and observed differences in interpretations, we expect the directive to have a minimal effect on covered bond ratings, though it may make a further notch of uplift available in countries where we currently do not consider 180 days' liquidity to be covered.

Since the initial publication of the legislation, we have observed the establishment of new national frameworks in member states that did not have them. As such, the directive supports the issuance of covered bonds from new jurisdictions and will act as a template to the benefit of the covered bond market across Europe.

Laggards Have Less Time To Implement The Rules

Since the initial EU framework passed into law, jurisdictions have been at work to transpose it into national law by the July 8, 2021, deadline. National authorities will have an additional 12 months to implement the new rules. We understand that the extended transition period was intended to ease implementation in countries requiring more extensive changes such as Austria and Spain. As countries are working to introduce new law, some have not met the current deadline, which means they will lose transition time before the next deadline in July 2022. That's when all countries should have new laws in place or risk losing their preferential regulatory treatment. While member states have found it difficult to meet the July 2021 target date, we believe that all will be ready by the July 2022 deadline.


A Comparison Of Proposals Issued Before The 2021 Deadline

S&P Global Ratings has published a number of commentaries about proposals, which some governments have published, for public comments about their transposition of the directive into national law. The proposals revealed that important differences, which means that the various national laws will not necessarily be directly comparable (see table 1).



Current Status Of Other Jurisdictions


The Financial Authority and the State Department have worked together to transpose the EU legislation into local law-- without public comment. We understand that the final proposal has been submitted to the Finnish parliament for final approval.

We understand the proposal includes a higher regulatory overcollateralization (OC) limit of 5% but includes flexibility for issuers to qualify a 2% OC. We expect (loan-to-value) LTV limits and limits on commercial real estate to remain at current levels.

While the current Finnish covered bond law does not explicitly require 180 days of liquidity coverage, we expect such requirements to be part of the new law. That should also include the possibility for issuers to consider the LCR for banks when calculating the 180-day liquidity need.

Finnish issuers currently make use of soft-bullet covered bonds. We expect the law to require a more formal process for extension triggers.

We expect the Finnish parliament to introduce legislation transposing the EU harmonization into law in July 2021. We expect additional supporting legislation to be passed before the 2022 deadline.


In March, the National Bank of Belgium (NBB), the Belgian banking regulator, released a private consultation paper containing a first draft proposal of the law and royal decree to the covered bond working group of the Belgian banking federation (Febelfin). In April, Febelfin sent comments and observations to the NBB. The final version, which has been reviewed by the Belgian Ministry of Finance and the Belgian government, has been submitted to the Belgian parliament for approval, which we will likely occur after the summer recess.

Because the Belgian covered bond law is relatively new, adopted by parliament on Aug. 3, 2012, and already includes several "'best-practice"' provisions, we understand that changes will be limited and focus on specifying extension conditions for soft-bullet covered bonds. This is in accordance with the EU legislator's intention of removing issuers' discretion on maturity extension, to permit it only for objective reasons.


The Dutch Ministry of Finance released a public consultation paper on March 8, 2021, for which the response period closed on April 5, 2021. We now understand that the implementation into Dutch legislation will take longer than initially expected and that the deadline of July 8, 2021, will not be met. Due to the summer holiday period in the Netherlands, the approval timeline will be delayed to September.

We note that the Dutch covered bond legislation is a principles-based framework. It was last updated in January 2015 to incorporate, among other requirements, a 5% minimum OC level and 6 months' of liquidity provisioning. We understand that changes to the law will be rather limited and will specify the conditions for extending the maturity of soft-bullet covered bonds.


On June 25, 2021, the Spanish government published a draft of the prosed law that will transpose the European directive into the Spanish legislative framework. The consultation period ends July 16, and the intention is that the law would take effect by July 1, 2022.

As expected, the proposed law includes several aspects that will radically change the existing regulation, which had major differences those of other EU countries.

The main changes include the introduction of an cover asset register and increase of the regular control and supervision of the covered bond program at two levels: by the external or internal controller (proposed by the issuer and approved by the Bank of Spain), and directly by the Bank of Spain.

Legal OC proposed is zero for mortgage covered bonds and 10% for public-sector covered bonds, compared with 25% and 43% currently. Voluntary OC is proposed to be at the issuer's discretion.

The proposed law also defines the LTV limit for eligibility criteria for mortgage loans, which is 60% generally and 80% for residential mortgage loans. Another new concept is the requirement of updated valuations and the need to include additional guarantees if the property devalues for a defined period of time and the LTV limit is breached. Other proposed additions to the legislation include the liquidity buffer for 180 days and the possibility to issue soft-bullet covered bonds, with maturity extended in certain specific circumstances defined in the law.

Derivatives must be registered in the cover pool and must survive the insolvency of the issuer, which is another change. In case of an issuer insolvency, a specific administrator will be named to independently manage the cover pool assets, which will remain isolated from the issuer's insolvency state.

The proposal aligns the legal framework to the European directive. The reduction of the legal minimum OC requirement raises questions about future OC levels in the existing programs, which could reduce substantially in many cases, including how that reduction will affect the ratings and be perceived by current covered bond investors.

Eastern Europe

The transposition of the harmonization directive into national law by EU governments should prove to be a supporting factor for covered bond issuance. In some countries, that will represent new legislation dedicated to the covered bond market or alignment of local frameworks to the best practices of more established markets. With four months left for this process, it is not entirely clear where each country stands:

  • We understand that in Hungary, the act on the amendment of the Hungarian Mortgage Bank Act in relation to the transposition of the directive had been approved by the parliament, and it has been published in the official journal in May.
  • The Latvian government introduced a legislative framework to parliament for covered bonds in October 2020. The law was passed in May 2021.
  • In Estonia and Lithuania, work is in progress, but no draft law is yet in parliament.
  • We understand that a proposal for the Czech law will be discussed in parliament soon.
  • The review of the Polish framework is likely to happen in 2022.
  • In Croatia where reforms were on hold, the existing working group has been reactivated and is developing a covered bond legal framework, and implementation of the directive is in progress.
  • We currently have no visibility about the situation in Slovakia.

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-European Economic Area 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 provisions of the directive have been applied (2024).

Similarly, the Commission will assess the case for introducing European Secured Notes, a dual recourse instrument backed by riskier types of assets such as SME loans, within two years after the transposition of the directive into national laws.

Editor: Rose Marie Burke. Digital Designer: Joe Carrick-Varty.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Casper R Andersen, Frankfurt + 49 69 33 999 208;
Secondary Contacts:Adriano Rossi, Milan + 390272111251;
Ana Galdo, Madrid + 34 91 389 6947;

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to:

Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back