General description

1. Structural elements of covered bonds
2. Covered bond register
3. Cover pool
4. Covered bond programme and types of bonds
5. Designation of covered bonds
6. Covered bonds supervision
7. Difference between covered bonds and securitisation

1. Structural elements of covered bonds

Covered bonds have the following structural features designed to protect their holders:

• Covered bonds can be issued only by banks (credit institutions).
• A mechanism of dual recourse protection is in place for covered bond holders.
• Cover assets and the physical collateral assets (e.g. a mortgage lien) securing cover assets are segregated from other assets in the event of bankruptcy, i.e. they are outside the reach of creditors other than the covered bond holders (this is the protection of the cover pool).
• Covered bond supervision is in place to ensure a high level of investor protection.
• There are quality requirements for the cover assets constituting the cover pool that backs covered bonds.

2. Covered bond register

A covered bond register is a way of segregating activities and assets related to the issuance of covered bonds from the other activities of the bond issuer (bank). In Europe there are several models of this separation, such as:

1. where universal banks each maintain their own covered bond register (this happens in, for example, Slovakia and the Czech Republic);
2. where specialised mortgage banks that do not take deposits and issue only covered bonds each maintain their own covered bond register (Poland and Hungary);
3. where special purpose vehicles/entities (SPVs/SPEs) each maintain their own covered bond register;
4. where one market includes a combination of the above models (for example, the first and second models are present in Germany).

3. Cover pool

A cover pool is a set of high-quality assets securing the payment obligations (principal and interest) attached to covered bonds under a particular covered bond programme; the assets that secure the covered bonds are called cover assets and the assets (e.g. mortgage liens – buildings) that secure the cover assets are called physical collateral assets.

The cover pool typically consists of primary and substitution assets, hedging derivatives, liquid assets constituting the cover pool liquidity buffer, and eligible assets constituting the overcollateralisation (the value of assets exceeding the entirety (100%) of the value of the covered bonds). Each of these asset types is designed to mitigate a different type of risk.

4. Covered bond programme and types of bonds

Program krytých dlhopisov (PKD)

A covered bond programme (CBP) is a structured framework for the issuance of covered bonds; it specifies the rights and obligations of the issuer (bank) and details about the cover pool, including the structural features and risks of the respective type of primary assets (so that investors can better assets the risk associated with the covered bonds).

A covered bond programme may include multiple covered bond issues (each with a different International Securities Identification Number – ISIN) or multiple cover pools. An issuer (bank) may have more than one covered bond programme, and each programme is subject to prior approval by the Národná banka Slovenska.

Banks in Slovakia are permitted to operate up to four covered bond programmes, as follows:

• programmes comprising primary assets in the form of either mortgage loans or public sector assets, and the assets guaranteed by them, pursuant to the criteria laid down in Article 129 of Regulation (EU) No 575/2013 on prudential requirements for credit institutions (Capital Requirements Regulation – CRR), as follows:
  • CBP 1 – programme of mortgage covered bonds;
  • CBP 2 – programme of public covered bonds;

• programmes comprising primary assets in the form of either other mortgage loans or loans to public undertakings, and the assets guaranteed by them, pursuant to the criteria laid down in Directive (EU) 2019/2162 (the Covered Bond Directive – CBD), as follows:
  • CBP 3 – programme of other mortgage covered bonds;
  • CBP 4 – programme of public undertakings covered bonds.

5. Designation of covered bonds

The designation ‘covered bond’ may only be used by the bank that is the issuer of the covered bond and issues the bond in accordance with the Banking Act’s requirements for a covered bond programme. Furthermore, the bank may add a label to the covered bond, as follows:

1. ‘European Covered Bond (Premium)’ – if the bond meets the requirements laid down in the EU’s Covered Bond Directive (CBD) and in Article 129 of the EU’s Capital Requirements Regulation (CRR), which defines a narrowed list of eligible assets;
2. ‘European Covered Bond’ – if the bond meets only the requirements laid down by the CBD, which defines principles for a broader list of eligible assets (e.g. aircraft) and assets traditionally used in national markets;
3. according to the type of primary assets specified in the bond’s prospectus and issuance terms and conditions – for example, as ‘public covered bonds’, ‘mortgage covered bonds’, or ‘European mortgage covered bonds – premium’ etc.

6. Covered bonds supervision

In order to ensure a high level of investor protection, the EU’s Covered Bond Directive (CBD) sets out rules for the public supervision of covered bonds. In the context of covered bonds, ‘public supervision’ means supervision conducted by a public sector body (designated by the competent authority) over covered bond programmes in order to ensure compliance with the requirements for covered bonds.

Národná banka Slovenska is the body designated to supervise covered bond–issuing banks operating in the territory of Slovakia in relation to their activities related to covered bond programmes.

In the Slovak market, a bank issuing covered bonds is required to have a covered bond programme (CBP) administrator (monitor) and deputy administrator, who are appointed by Národná banka Slovenska either on its own initiative or the bank’s proposal.

The CBP administrator and deputy administrator monitor the bank’s issuance of covered bonds and compliance with the terms and conditions of the respective covered bond programme, in particular regarding coverage formalities and requirements under the legislative framework for covered bond programmes. CBP administrators and deputy administrators are subject to supervision by Národná banka Slovenska (NBS). A bank’s CBP administrator is required to submit to the NBS once a year a report on the bank’s covered bond programme. The roles of CBP administrators and deputy administrators are in no way a substitute for the supervision conducted by the NBS.

7. Difference between covered bonds and securitisation

Covered bonds are not securitised securities in the sense of asset-backed security (ABS). Residential mortgage-backed security (RMBS) are formed on different principles than are mortgage covered bonds. Securitised securities exist primarily in the US market, while covered bonds are the norm in the European market. See also Securitisation.