Opinion of the European Central Bank of 25 April 2001 at the request of the Irish Department of Finance on a draft legislative proposal on a Mortgage and Public Credit Bond Bill (CON/2001/6)
Date: 2001-04-25
Institutions: European Central Bank
Subjects: European System of Central Banks, Ireland, central bank, credit institution, euro area, financial stability, mortgage bank, public borrowing, real estate credit, securities

OPINION OF THE EUROPEAN CENTRAL BANK

of 25 April 2001

at the request of the Irish Department of Finance on a draft legislative proposal on a

Mortgage and Public Credit Bond Bill 

CON/2001/6

1.

On  14  March  2001  the  European  Central  Bank  (ECB)  received  a  request  from  the  Irish

Department of Finance for an ECB opinion on a preliminary draft Mortgage and Public Credit

Bond Bill.

2. 

The  ECB’s  competence 

to  deliver  an  opinion 

is  based  on  Article 2  of  Council

Decision 98/415/EC  of  29 June  1998  on  the  consultation  of  the  European  Central  Bank  by

national authorities regarding draft legislative provisions1, as the legislative proposal contains

provisions  concerning  a  national  central  bank,  as  well  as  rules  applicable  to  financial

institutions  insofar  as  they  materially  influence  the  stability  of  financial  institutions  and

markets.  In  accordance  with  Article  17.5,  first  sentence,  of  the  Rules  of  Procedure  of  the

European Central Bank, this ECB opinion has been adopted by the Governing Council of the

ECB.

3. 

The draft Bill makes provision for the designation and regulation by the Central Bank of Ireland

(CBI)  of  special-purpose  credit  institutions  designated  by  the  CBI  as  a  ‘mortgage  credit

institution’  and/or  a  ‘public  credit  institution’,  respectively.  Such  designated  mortgage  and

public credit institutions may issue mortgage and public credit securities, and these securities or

any related hedge contracts would be secured on pools of underlying mortgage or public credit

assets  and  other  specified  assets  (i.e.,  deposits,  tier  one  assets  for  ESCB  monetary  policy

operations and other assets acceptable to the CBI). The CBI would be empowered to designate

as a mortgage and/or public credit institution a credit institution which is carrying on relevant

‘qualifying activities’ only, which relate broadly to dealings in mortgage and public credit and

related financing (including deposit-taking) and hedging activities. The ECB notes that, under

the draft Bill, qualifying activities also include dealings in tier one assets for ESCB monetary

policy  operations  and/or  property  which  is,  from  time  to  time,  included  by  a  NCB,  with

approval of the ECB, in its national list of eligible tier two assets for  ESCB  monetary  policy

operations. The ‘qualifying activities’ requirement would imply that the majority of Irish credit

1

OJ L 189, 3.7.1998, p. 42-43.

                                                          
institutions  would  have  to  establish  special  purpose  credit  institutions  in  order  to  issue

mortgage or public credit securities.

4. 

The ECB welcomes this initiative to lay the legislative foundations for the issuance of mortgage

and  public  credit  bonds  by  Irish  credit  institutions.  The  ECB  notes  that  the  legislative  and

regulatory framework envisaged for the issuance of these asset-backed securities shares many

common  characteristics  with  similar  structures  in  other  member  states  of  the  European

Community,  including  Austria,  Denmark,  Finland,  France,  Germany,  Luxembourg  and  Spain.

The  ECB  notes  that  the  legislation  has  been  explicitly  designed  by  the  Irish  Government  to

bring Ireland in line with best practices in other European financial centres, taking into account

that  the  introduction  of  the  euro  and  the  new  monetary  policy  framework  have  led  to  the

development of an integrated and competitive money market in the euro area. In this regard, the

ECB  understands  that  this  initiative  enjoys  the  support  of  both  domestic  Irish  banks  and

building  societies  as  well  as  credit  institutions  conducting  cross-border  operations  out  of

Dublin’s  International  Financial  Services  Centre.  The  ECB  considers  that  the  Irish

Government’s initiative will make a positive contribution to the integration of capital markets

in the euro area.

5. 

The  ECB  draws  attention  to  the  criteria  which  assets  must  fulfil  in  order  to  be  eligible  as

collateral  for  Eurosystem  monetary  policy  and  intra  day  credit  operations.  Under  the  ECB

Guideline of 31 August 2000 on monetary policy instruments and procedures of the Eurosystem

(ECB/2000/7)2,  Annex  I  (General  Documentation  on  Eurosystem  monetary  policy  operations

and procedures), Chapter 6.2 (Eligible Assets – Tier one assets), a number of eligibility criteria

are specified to tier one assets consisting of marketable debt instruments fulfilling uniform euro

area-wide eligibility for Eurosystem monetary policy and intra day credit operations. 

First, the assets must be debt instruments. It is understood that the mortgage and public credit

securities  envisaged  by  the  draft  Bill  will  be  structured  as  mortgage  and  public  credit  bonds

only, and would therefore fulfil this requirement. 

Second, the assets must meet high credit standards, and in the assessment of the credit standard

of debt instruments, the ECB takes into account, inter alia, available ratings by market agencies

as well as certain institutional criteria  which  would  ensure  particularly  high  protection  of  the

holders.  In  this  regard,  debt  instruments  issued  by  credit  institutions  which  do  not  comply

strictly with the criteria set out in Article 22(4) of the UCITS Directive3 are accepted in tier one

only if each issue as such is awarded a rating (by a rating agency) which indicates, in the view

of the Eurosystem, that the debt instrument meets high credit standards. The ECB notes that it

2  OJ L 310, 11.12.2000, p. 1.
3 Council  Directive  88/220/EEC  of  22  March  1988  amending,  as  regards  the  investment  policies  of  certain  UCITS,
Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for
collective investments in transferable securities (UCITS), OJ L 100, 19.04.1988 p. 31.

2

                                                          
is the intention of the Irish Government that certain features of the instruments, including the

high quality of the underlying assets and the preferential creditor status afforded to investors in

the bonds, are designed to achieve a triple A rating.

Third, the assets must be located in the euro area (so that realisation is subject to the law of a

Member State of the euro area), transferable in book-entry form and deposited with a national

central  bank  or  with  a  central  securities  depository  which  fulfils  the  minimum  standards

established by the ECB. The description of the standards for the use of eligible SSSs in the euro

area can be found on the ECB’s website (www.ecb.int). The ECB assumes that, following the

establishment of mortgage and public credit institutions pursuant to the provisions of the draft

Bill, further information will become available regarding the proposed procedures surrounding

the issuance, custody and settlement of mortgage and public credit bonds.

Fourth, the assets must be denominated in euro.

Fifth,  the  assets  must  be  issued  (or  guaranteed)  by  entities  established  in  the  EEA.  In  this

regard, the ECB notes that under the draft Bill the CBI may only designate credit institutions

that are incorporated in Ireland. 

Sixth, the assets must, at least, be listed or quoted on a regulated market as defined according to

the Investment Services Directive,4 or listed, quoted or traded on certain non-regulated markets

as specified by the ECB. In this regard, debt instruments issued by credit institutions which do

not comply strictly with the criteria set out in Article 22(4) of the UCITS Directive are accepted

in tier one only if they are listed or quoted on a regulated market as defined according to the

Investment Services Directive and comply with the requirements of the Prospectus Directive5.

Furthermore,  market  liquidity  may  be  taken  into  account  by  the  ECB  when  determining  the

eligibility of individual debt instruments. The ECB assumes that, following the establishment of

mortgage  and  public  credit  institutions  pursuant  to  the  provisions  of  the  draft  Bill,  further

information will become available regarding the listing, quotation or trading of issued mortgage

and public credit bonds on applicable markets.

Despite their eligibility, national central banks shall not, in general, accept as underlying assets

debt instruments issued or guaranteed by the counterparty, or by any other entity with which the

counterparty has close links, as defined according to Article 1(26) of the Banking Consolidation

Directive.6  However,  exempt  from  the  definition  of  close  links  are  cases  in  which  such  debt

4 Council  Directive  93/22/EEC  of  10  May  1993  on  investment  services  in  the  securities  field,  OJ L 141,  11.06.1993,

p. 27 ff.

5 Council  Directive  89/298/EEC  of  17  April  1989  coordinating  the  requirements  for  the  drawing-up,  scrutiny  and
distribution of the prospectus to be published when transferable securities are offered to the public, OJ L 124, 5.5.1989,
p. 8 ff.

6 Directive 2000/12/EC of the  European  Parliament  and  of  the  Council  of  20  March  2000  relating  to  the  taking  up  and

pursuit of the business of credit institutions, OJ L 126, 26.5.2000, p. 1.

3

                                                          
instruments  are  protected  by  specific  legal  safeguards,  e.g.  instruments  which  comply  strictly

with the criteria set out in Article 22(4) of the UCITS Directive.

Finally, all eligible assets must be usable in a cross-border context, implying that a counterparty

can receive credit from the national central bank of the Member State in which the counterparty

is established by making use of tier one instruments located in another Member State. The ECB

assumes that, following the establishment of mortgage and public credit institutions pursuant to

the  provisions  of  the  draft  Bill,  additional  information  will  become  available  regarding  the

proposed cross-border usage of the mortgage and public credit bonds.

6.  With respect to the question of close links, the ECB notes that the mortgage and public credit

securities envisaged by the draft Bill would appear to be designed to comply strictly with the

three criteria set out in Article 22(4) of the UCITS Directive. If, as laid down in Article 22(4) of

the  UCITS  Directive,  the  Irish  Government  sends  the  Commission  a  list  of  the  categories  of

bonds together with the categories of issuers authorised, in accordance with the draft Bill and

the supervisory arrangements contemplated by the draft Bill, to issue bonds complying with the

criteria  set  out  in  Article  22(4),  and  assuming  the  procedure  laid  down  in  Article  22(4)  is

applied,  the  mortgage  and  public  credit  bonds  will  normally,  without  further  action,

automatically qualify as tier one assets eligible for Eurosystem monetary policy and intra day

credit operations both by the parent entity of the relevant designated credit institution and by

other Eurosystem counterparties.  

7. 

The first criterion set forth in the UCITS Directive arises out of the reference in Article 22(4) to

“certain bonds when issued by a credit institution which has its registered office in a Member

State and is subject by law to special public supervision designed to protect bond-holders”. 

In this regard, as noted above, under the draft Bill the CBI may designate any credit institution

that is established in Ireland and holds an authorisation from the CBI as a mortgage or public

credit institution eligible to issue mortgage or public credit securities, and that the issuance of

such securities would be confined to such institutions. The ECB notes that, under the draft Bill,

it shall be a criminal offence for any person to act as a mortgage or public credit institution or

hold itself out as such unless designated as a mortgage and/or a public credit institution by the

CBI. The ECB also notes that the draft Bill makes provision for the revocation by the CBI of an

entity’s designated credit institution status, that the CBI may also apply to the Irish High Court

for an order revoking an institution’s  designation  in  a  wide  variety  of  circumstances  and  that

such  a  revocation  would  be  without  prejudice  to  either  a  designated  credit  institution’s

obligations in respect of any mortgage or public credit securities issued by it prior to revocation

or  the  security  of  the  holders  of  such  securities  over  underlying  mortgage  or  public  credit

assets.

The  ECB  also  notes  that,  under  the  draft  Bill,  every  mortgage  or  public  credit  institution  is

required to establish and maintain separate mortgage and public credit asset registers containing

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particulars  of  every  pool  asset  securing  its  obligations  under  mortgage  or  public  credit

securities and related hedge contracts, as well as a separate hedge contract register, and that no

entries  in  these  registers  may  be  made  or  altered  without  the  approval  of  the  ‘cover  asset

monitor’, a person appointed by the designated credit institution with the approval of the CBI to

monitor  observance  by  the  credit  institution  of  its  obligations  under  the  draft  Bill  (and  in

particular that the required level of assets is maintained in the relevant asset pools following the

issuance of securities or entry into related hedge contracts). The ECB also notes that the CBI

may make regulations in respect of cover asset monitors, including the qualification, selection,

appointment,  removal  and  functions  of  cover  asset  monitors  and  requirements  concerning

information reporting by the cover asset monitor to the CBI.

The ECB also notes that, under the draft Bill, on the occurrence of a potential insolvency event

with respect to a designated credit institution or a matured insolvency event with respect to its

parent  entity  or  the  revocation  by  the  CBI  of  a  credit  institution’s  designated  status,  the  CBI

may request the Irish National Treasury Management Agency (NTMA) to locate an alternative

service  provider  to  perform  the  designated  credit  institution’s  functions  in  relation  to  the

administration  and  servicing  of  mortgage  or  public  asset  securities,  related  hedge  contracts,

assets, asset pools and registers, or locate a parent entity for the designated credit institution or

act itself as alternative service provider for the institution. 

Finally, the ECB notes that under the draft Bill, it shall be a criminal offence for any person to

knowingly  provide  false  or  misleading  information  to  the  CBI,  a  cover  asset  monitor,  the

NTMA or any alternative service provider in the exercise of their respective functions.

8. 

The  second  criterion  to  which  Article  22(4)  of  the  UCITS  Directive  refers  is  that  “sums

deriving from the  issue  of  these  bonds  must  be  invested  in  conformity  with  the  law  in  assets

which,  during  the  whole  period  of  the  validity  of  the  bonds,  are  capable  of  covering  claims

attaching to the bonds”.

In  this  regard,  the  ECB  notes  that  the  draft  Bill  specifies  numerous  conditions  applicable  to

mortgage or public credit securities and pools, including matching requirements in relation to

the duration, aggregate principal amount and currency denomination of, or interest payable on,

assets comprised in the mortgage or public credit pools, as compared to outstanding mortgage

or public credit securities issued. With respect to mortgage credit assets in particular, the draft

Bill contains required loan-to-value (LTV) ratios with respect to underlying property assets, as

well  as  an  overall  limitation  on  mortgage  assets  secured  on  commercial  property.  The  ECB

notes that while no limit  or  restriction  applies  to  the  inclusion  in  a  mortgage  or  public  credit

pool of mortgage or public credit assets situated in a member state of the European Economic

Area (EEA), an overall limitation  applies  to  the  inclusion  of  mortgage  or  public  credit  assets

situated in Canada, the U.S., Switzerland and/or Japan, while mortgage or public assets situated

in  any  other  state  which  is  a  ‘Zone  A’  state  for  purposes  of  the  Banking  Consolidation

5

Directive,  as  amended,  supplemented  or  replaced)  may  only  be  included  in  the  mortgage  or

public credit pool if so provided in, and in accordance with, regulations made by the Minister

for Finance. The ECB also notes that, under the draft Bill, the CBI may by regulations provide

for the valuation basis, valuation methodology, time of valuation and any other matter relating

the  prudent  market  valuation  of  mortgage  credit  assets.  Finally,  it  is  noted  that  a  designated

credit institution shall not at any time issue mortgage or public credit securities if the aggregate

principal  amount  of  such  securities  that  are  in  issue  would  exceed  a  multiple  of  50  (or  such

other  multiple  as  may  be  specified  from  time  to  time)  of  its  own  funds  (determined  in

accordance with the Banking Consolidation Directive and the Capital Adequacy Directive7, as

amended, supplemented or replaced).

9. 

The third criterion to which Article 22(4) of the UCITS Directive refers is that “in the event of

a failure of the issuer, [such assets] would be used on a priority basis for the reimbursement of

the principal and payment of the accrued interest.” 

In this regard, the ECB notes that the draft Bill provides, inter alia, that, notwithstanding any

rule of Irish insolvency law, or the occurrence of a potential or matured insolvency event with

respect to a designated credit institution or related company, the claims of a holder of mortgage

or public credit securities issued by that designated credit institution shall continue to be valid

and  legally  enforceable  against  the  issuer,  and  that  the  assets  comprised  in  the  cover  asset

registers and related asset pools shall not form part of the designated credit institution’s assets

for the purpose of any insolvency proceeding. The ECB takes particular note of the draft Bill’s

provisions to the effect that the claims of a holder of mortgage or public credit securities issued

by a designated credit institution shall, subject to considerations of fraud or misrepresentation

under Irish law, rank, as respects recourse to assets comprised in the relevant asset pools, (a)

senior and in priority to all claims and rights of any member, shareholder and other creditors of

whatever  kind  (whether  secured,  unsecured  or  preferred  by  any  other  statute  or  laws)  of  that

institution; (b) rateably and pari passu in all respects with other holders of mortgage or public

credit  securities,  related  hedge  counterparties  and  cover  asset  monitors;  and  (c)  junior  to  any

fees or costs payable to the NTMA or any other alternative service provider appointed on the

occurrence  of  a  potential  or  matured  insolvency  event  with  respect  to  a  designated  credit

institution  or  its  parent  entity,  or  upon  the  revocation  by  the  CBI  of  a  credit  institution’s

designated status.

Also, it is noted that while the draft Bill provides that a designated credit institution which has

any  mortgage  or  public  credit  securities  outstanding  shall  not  grant  or  suffer  to  subsist  any

security  over  pool  assets  or  property  situated  in  Ireland,  a  designated  credit  institution  may

grant or permit to subsist security over mortgage or public credit assets in an asset pool where

7 Council  Directive  93/6/EEC  of  15  March  1993  on  the  capital  adequacy  of  investments  firms  and  credit  institutions,

OJ L 141, 11.6.1993, p. 1 ff.

6

                                                          
the  relevant  assets  are  situated  outside  Ireland  and  the  persons  having  the  benefit  of  such

security  are  those  entitled  to  security  over  the  relevant  assets  under  the  draft  Bill  (e.g.,  the

holders of securities). It is suggested that it may be appropriate to extend the prohibition on the

creation of security interests in favour of third parties to pool assets or property situated outside

Ireland. 

10.  The ECB notes that the draft Bill provides that the Minister for Finance may, after consultation

with  the  CBI,  by  regulations  (i.e.,  secondary  legislation)  confer  on  the  CBI  such  additional

functions  connected  with  the  CBI’s  functions  under  the  Bill  as  the  Minister  considers

appropriate,  and  that  the  draft  Bill  also  provides  that  the  Minister  and  the  CBI  may  make

regulations  in  respect  of  designated  credit  institutions  generally,  and  with  respect  to  a  wide

variety of specific matters addressed by the Bill. The ECB notes that, insofar as any Ministerial

regulations affect the powers of the CBI as designator and regulator of designated mortgage and

public  credit  institutions,  consideration  may  need  to  be  given  to  consulting  the  ECB  in

accordance with Article 2 of Council Decision 98/415/EC of 29 June 1998 on the consultation

of the European Central Bank by national authorities regarding draft legislative provisions.

11.  The  ECB  understands  that  a  number  of  the  draft  Bill’s  provisions,  including  some  of  the

provisions discussed in this opinion, are still under discussion by interested parties, including

the CBI and interested market participants. Insofar as those provisions of the draft Bill which

delineate the precise powers of the CBI as designator and regulator of designated mortgage and

public credit institutions are the subject of substantive amendments, the ECB would appreciate

being provided with the final draft Bill that will be presented by the Minister for Finance to the

Oireachtas. 

12.  The  ECB  confirms  that  it  has  no  objection  to  this  ECB  opinion  being  made  public  by  the

competent national authorities at their discretion.

Done at Frankfurt am Main on 25 April 2001.

The President of the ECB

[signed]

Willem F. DUISENBERG

7