Opinion of the European Central Bank of 20 March 2015 on the legal framework for covered bonds and mortgage banks (CON/2015/11)
Date: 2015-03-20
Institutions: European Central Bank
Subjects: Poland, bond, financial solvency, financial stability, liquidity control, money, mortgage, mortgage bank, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 20 March 2015 

on the legal framework for covered bonds and mortgage banks  

(CON/2015/11) 

Introduction and legal basis 

On  5  February  2015  the  European  Central  Bank  (ECB)  received  a  request  from  the  Polish  Ministry  of 

Finance  for  an  opinion  on  a  draft  law  amending  the  Law  on  covered  bonds  and  mortgage  banks  and 

certain other laws (hereinafter the ‘draft law’). 

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the sixth indent of Article 2(1) of Council Decision 98/415/EC1, as 

the  draft  law  relates  to  rules  applicable  to  financial  institutions  insofar  as  they  materially  influence  the 

stability  of  financial  institutions  and  markets.  In  accordance  with  the  first  sentence  of  Article 17.5  of  the 

Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion. 

1.  

Purpose of the draft law 

1.1  The main purpose of the draft law is to enhance the availability of well-diversified funding sources 

from capital market investors to the Polish banking sector. This is in order to address the potential 

threat  to  the  stability  of  the  Polish  banking  sector  caused  by  maturity  mismatches  in  mortgage 

financing,  primarily  based  on  short-term  liabilities  such  as  deposits.  The  differences  in  the 

maturities  of  their  assets  and  liabilities  expose  credit  institutions  to  liquidity  risks.  In  addition,  the 

draft  law  contributes  to  the  preparations  by  the  Polish  financial  sector  to  comply  with  Regulation 
(EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council2  and    Directive  2013/36/EU  of 
the European Parliament and of the Council3, in particular the liquidity coverage and stable funding 

requirements.  

1.2  The  draft  law  seeks  to  achieve  these  aims  by  changing  the  funding  model  for  mortgage  lending 

through the development of long-term debt instruments. This will enable credit institutions to reduce 

liquidity  shortages  due  to  maturity  mismatches  and  thereby  facilitate  their  compliance  with,  in 

particular,  regulatory  liquidity  standards.  This  could  be  achieved  by  developing  a  market  for 

covered bonds that, while allowing Polish credit institutions to reduce the maturity mismatches, is 

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2  

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Council  Decision  98/415/EC  of  29 June  1998  on  the  consultation  of  the  European  Central  Bank  by  national 
authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 

Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on  prudential 
requirements  for  credit  institutions  and  investment  firms  and  amending  Regulation  (EU)  No  648/2012  (OJ  L  176, 
27.6.2013, p. 1).  
Directive 2013/36/EU of  the  European  Parliament and of  the Council of 26  June 2013 on access  to  the activity  of 
credit  institutions  and  the  prudential  supervision  of  credit  institutions  and  investment  firms,  amending  Directive 
2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338). 

 
 
 
 
                                                 
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considered attractive to investors. To ensure a wider use of covered bonds by banks for refinancing 

purposes,  the  draft  law  introduces  amendments  aimed  at  eliminating  current  barriers  to  the 

development and the use of such instruments. 

1.3  To  this  end,  the  draft  law  amends  the  Law  on  covered  bonds  and  mortgage  banks  of 

29 August 19974 (hereinafter the ‘Law on covered bonds’) by:  

(a) 

compelling  a  mortgage  bank  to  over-collateralise  its  covered  bonds  by  at  least  10%  of  the 

issue, and to establish a liquidity buffer in order to secure the payment of interest on covered 

bonds within a period of 6 consecutive months; 

(b) 

clarifying  that  a  bondholder  does  not  have  a  statutory  or  contractual  right  to  redeem  the 

covered  bonds  prematurely.  At  the  same  time,  this  does  not  affect  the  issuer’s  right  to 

exercise the early redemption of covered bonds; 

(c) 

increasing the limit applicable to residential loans secured by a mortgage from 60% to 80% 

of the mortgage lending value of a property, for purposes of the issuance of covered bonds; 

(d) 

providing  that  regular  asset  coverage  and  liquidity  tests  should  be  performed  by  mortgage 

banks  as  well  as  authorising  the  Minister  for  Finance  to  further  define,  in  a  separate 

regulation, the specific technical aspects of such tests; 

(e) 

clarifying that the eligibility criteria for a single loan secured by a mortgage (hipoteka) does 

not exceed 100% of the mortgage lending value of a property. This will be calculated at the 

date of granting or, if a mortgage credit receivable is purchased by the mortgage bank, at the 

date of purchasing of a given credit, rather than as an ongoing obligation to keep the loan-to-

value ratio (LTV) at a maximum level of 100% during the life of mortgage credit; 

(f) 

addressing  issues  identified  with  regard  to  the  financing  of  development  projects  under 

construction.  The  draft  law  introduces  the  right  for  a  mortgage  bank  to  request  that  the 

relevant court enters a claim for the registration of the mortgage on a property, on which a 

development  project  is  implemented,  even  without  the  prior  consent  of  the  relevant 

developer.  The  disclosure  of  this  claim  is  a  condition  for  the  disbursement  of  funds  from  a 

loan  granted  for  the  purchase  of  a  development  property  that  is  under  construction.  At  the 

same time, there is no change to the principle that covered bonds may be issued in relation 

to such credit receivables only upon the registration of the mortgage. 

1.4  With a view to ensuring the adequate and timely service of bondholders in the event of an issuer’s 

insolvency,  thereby  securing  a  more  favourable  rating  agency  assessment  of  the  Polish  covered 

bond  issuers,  the  draft  law  also  introduces  amendments  to  the  Law  on  bankruptcy  and 
rehabilitation  of 28 February 20035 (hereinafter the ‘Law on bankruptcy’). The  key features of the 

draft law in this respect include:  

(a) 

a mandatory 12 month extension of the redemption date of all covered bonds. The proposed 

extension period starts on the date the Polish mortgage bank issuer is declared insolvent;  

4  

5  

Dziennik Ustaw (Dz. U.) of 2003, No. 99, item 919. 
Dz. U. of 2012, item 1112. 

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(b) 

the  introduction  of  an  asset  coverage  test,  which  verifies  whether  the  separate  insolvency 

estate is sufficient to fully satisfy the claims of the bondholders on the verification date, and a 

liquidity test, which verifies whether the separate insolvency estate is sufficient to fully satisfy 

the claims of the bondholders on the extended redemption dates. The results of these tests 

are  approved  by  the  Polish  Financial  Supervision  Authority  and  further  procedure  is 

determined based on such results;  

(c) 

the clarification of the rules on convening bondholder meetings and voting majorities;  

(d) 

rules on the “earmarking” of funds in a separate insolvency estate; 

(e) 

the  clarification  that  set-off  is  not  permitted,  other  than  in  respect  of  claims  arising  under 

hedging transactions, and in respect of settlements processed under a payment or securities 

settlement system.  

1.5   The draft law also eliminates some of the barriers to the development of covered bonds that were 

present  in  Polish  tax  legislation.  Namely,  it  amends  the  Law  on  corporate  income  tax  of 
15 February  19926  and  the  Law  on  personal  income  tax  of  26  July  19917,  by  introducing  the 

following measures: 

(a)   an exception from the tax at source, which would normally need to be withheld by the bonds’ 

issuers  on  interest  paid  abroad  to  entities  that  are  tax  residents  in  jurisdictions  other  than 

Poland, but who have a taxable source of income in Poland; and 

(b)   enabling the mortgage banks to recognise specific provisions, particularly impairment losses, 

made for receivables arising from credits, which are purchased by them from other banks, in 

tax  deductible  expenses  and  to  write-off  such  receivables  as  irrecoverable  after  having 

documented  the  inability  to  recover  them.  This  will  ensure  the  equal  treatment  of  credits 

granted by mortgage banks and credits purchased by such entities in the area of tax law.  

1.6   Additionally, the draft law introduces solutions aimed at facilitating the investment in covered bonds 

by Polish domiciled pension funds. To this effect, the draft law amends the Law on the organisation 
and operation of pension funds of 28 August 19978 by excluding covered bonds from the subjective 

limits  imposed  collectively  on  a  certain  group  of  financial  instruments  by  reducing  investments  in 

securities of a single issuer to the level of 10% of a fund’s assets, and imposing a single limit of 5% 

of a fund’s assets in relation to covered bonds issued by a single issuer or a group of issuers. 

1.7  Finally,  the  draft  law  amends  the  Law  on  cooperative  savings  and  credit  unions  of  5  November 
20099 and enables Polish domiciled credit unions to invest directly and unconditionally in covered 

bonds. This is justified by the fact that such credit unions, similarly to Polish domiciled commercial 

banks, are subject to supervision of the Polish Financial Supervision Authority and are covered by 

the Polish deposit guarantee scheme.  

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Dz. U. of 2014, item 851. 
Dz. U. of 2012, item 361. 
Dz. U. of 2013, item 989, 289 and 1717. 
Dz. U. of 2013, item 1450. 

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2. 

General observations  

2.1  The  ECB  broadly  welcomes  the  draft  law  intended  to  promote  the  development  of  the  Polish 

covered  bond  market.  In  particular,  the  ECB  welcomes  the  envisaged  over-collateralisation 

requirement  as  a  risk  mitigation  tool  and  the  requirement  for  regular  asset  coverage  and  liquidity 

tests to be performed by the mortgage banks. At the same time, the Polish authorities may wish to 

consider  the  level  of  the  over-collateralisation  requirement,  taking  into  account  the  level  of  asset 

encumbrance. Moreover, better-capitalised covered bond issuers typically do not need high levels 

of over-collateralisation to enhance the creditworthiness of their covered bonds. Hence, providing 

more flexibility in terms of over- collateralisation may improve the attractiveness of issuing covered 

bonds particularly for better-capitalised banks. 

2.2  The  measures  included  in  the  draft  law  may  benefit  from  the  solutions  included  in  the 

Recommendation of the European Systemic Risk Board of 20 December 2012 on funding of credit 
institutions (ESRB/2012/2)10, and should be assessed against the recommendations for improving 

covered  bond  frameworks  set  out  by  the  European  Banking  Authority  (EBA)  in  its  Report  on  EU 

Covered  Bond  Frameworks  and  Capital  Treatment,  published  in  July  2014  which  defines  best 

practises  with  regard  to,  among  other  things,  valuation  of  mortgage  cover  assets,  LTV  criteria, 

coverage principles and over-collateralisation. 

2.3.   Given  the  complexity  of  the  subject  matter  and  the  legal  framework  for  covered  bonds  and 

mortgage  banks  in  Poland,  the  draft  law  would  undoubtedly  benefit  from  an  explanatory 

memorandum,  explaining  in  detail  the  reasoning  behind  particular  amendments  and  how  they 

relate  to  each  other  and  to  other  Polish  legislation.  The  detailed  description  of  the  draft  law 

contained  in  the  present  ECB  Opinion  should  facilitate  the  preparation  of  such  explanatory 

memorandum.  

3. 

Safety thresholds and concentration of secured long-term debt instruments 

3.1  The current framework provides for an eligibility threshold where the LTV for a single loan secured 

by  a  mortgage  may  not  be  higher  than  100%.  In  addition,  the  law  establishes  limits  on  the 

applicable  mortgage  lending  values  for  the  purposes  of  the  issuance  of  covered  bonds.  In  this 

regard,  lower  ratios  increase  the  resilience  of  banks  and  their  borrowers  to  adverse  shocks, 

thereby enhancing the resilience of the financial system as a whole. Hence, given market practices, 

in certain Member States with active covered bond markets, the threshold is lower than 80% with 

respect to residential mortgages. 

3.2  Coherence  of  the  Polish  covered  bond  laws  with  European  standards  and  covered  bond 

frameworks that are already in place should support the liquidity of covered bonds issued under the 

new draft law, thereby further increasing investor interest and contributing to resilience of the Polish 

covered bond market. The best practises published by the EBA in July 2014 serve as an indicative 

benchmark to achieve the warranted level of standardisation.  

3.3 

In order to enhance the clarity of the legal framework, the wording of the existing provisions in the 

current  Law  on  covered  bonds  concerning  the  applicable  lending  limits  for  the  purposes  of  the 

10  

OJ C 119, 25/4/2013, p. 1. 

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issuance of covered bonds should be made clearer (see, in particular, paragraph 1 of Article 13 of 

the  Law  on  covered  bonds).  Moreover,  as  regards  the  calculation  of  the  ongoing  cover  for 

mortgage covered bonds,  we understand that such calculations consider only disbursed amounts 

and this should be stipulated clearly in the amended Article 18. 

3.4  As an additional safeguard, the draft law should include a provision ensuring that the valuation for 

purposes  of  determining  the  mortgage  lending  values  is  carried  out  by  an  expert  who  is 

independent  from  the  credit  approval  process.  As  regards  the  eligibility  threshold,  the  monitoring 

and  updating  of  the  valuation  of  the  collateral  assets  and  the  corresponding  LTV  calculations,  at 

least on an annual basis, could also strengthen the regime. 

3.5 

In  addition  to  the  proposed  provisions  related  to  development  projects  under  construction, 

consideration  could  be  given  to  the  inclusion  of  a  robust  mechanism  for  the  valuation  of  such 

projects to ensure that the mortgage lending value for the purposes of the covered bond does not 

exceed the status value of the achieved construction stage, as certified by an independent expert. 

4. 

Amendments to the provisions related to bankruptcy and rehabilitation 

4.1  The ECB welcomes the proposed changes to the Law on bankruptcy to the extent that they clarify 

the treatment of covered bondholders in the event of the issuer’s insolvency and therefore provide 

for more transparency and legal certainty. However, it is noted that the current insolvency regime in 

Poland  may  need  to  be  adapted  to  transpose  Directive  2014/59/EU  of  the  European  Parliament 
and of the Council11 and that a draft of a new restructuring law is currently being considered by the 

Polish authorities. To this end, the ECB invites the Polish Ministry of Finance to clarify the scope 

and relationship of the draft law with Directive 2014/59/EU and the proposed provisions of the new 

restructuring law, in order to ensure a consistent approach to these legislative initiatives. 

4.2  The draft law provides for a mandatory automatic extension of the redemption dates of all relevant 

covered bonds by 12 months with the extension to become effective on the date of declaration of 

the issuer’s insolvency. Notwithstanding any further possible changes to Polish law as a result of 

the transposition of Directive 2014/59/EU, it should be clarified that the extension is warranted in all 

circumstances and especially in situations where asset coverage tests and liquidity tests have been 

performed successfully according to the schedule set out in the law. The ECB understands that it is 

the intention of the Polish authorities to provide sufficient time for maximum realisation of the value 

of the cover pool in the event that an issuer is declared insolvent. The ECB welcomes this notion 

but  recommends  an  optional  rather  than  mandatory  process  at  the  discretion  of  the  resolution 

authority  or  insolvency  practitioner.  The  minimising  of  the  extension  risk  could  promote  a  more 

robust  access  by  mortgage  banks  to  longer-term  funding  as  well  as  underpin  the  stability  of  the 

asset class for investors. Moreover, the ECB recommends that mortgage banks should be required 

to  put  in  place  appropriate  and  prudent  operational  procedures  aimed  at  ensuring  an  orderly 

functioning of the covered bond programme upon default or resolution of an issuer. 

11  

Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for 
the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, 
and  Directives  2001/24/EC,  2002/47/EC,  2004/25/EC,  2005/56/EC,  2007/36/EC,  2011/35/EU,  2012/30/EU  and 
2013/36/EU,  and  Regulations  (EU)  No  1093/2010  and  (EU)  No  648/2012,  of  the  European  Parliament  and  of  the 
Council (OJ L 173, 12.6.2014, p. 190). 

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4.3  The draft law provides that the amended Article 446c(3) of the Law on bankruptcy will allow a two-

thirds majority of bondholders to decide that the pass-through procedure will not apply. However, 

unlike in the proposed amended Article 446d(1) of the Law on Bankruptcy, the draft law does not 

specify any alternative measures that may be adopted by bondholders. 

ECB-PUBLIC 

This opinion will be published on the ECB’s website.  

Done at Frankfurt am Main, 20 March 2015. 

[signed] 

The President of the ECB 

Mario DRAGHI 

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