Banking and finance

Transposition of European directives in the area of covered bonds

Published on 28th Feb 2022

Royal Decree-Law 24/2021, of 2 November (the "RDL"), transposes Directive (EU) 2019/2162 of the European Parliament and of the Council of 27 November 2019 on the issue of covered bonds and covered bonds public supervision whereby the RDL applies to covered bond issues made in Spain by credit institutions established in Spain or covered bond issues made outside Spain by Spanish credit institutions where such issues are made subject to the RDL.

The importance of covered bonds lies in the cover assets with which their issuer guarantees the payment of principal and interest on covered bonds to their holders.

The RDL develops the regulations applicable to the issue of covered bonds on the basis of a portfolio composition principle so that the cover pools are always made up of assets with different characteristics. This includes structure, duration and risk profile, which must be subject to a special register by the issuing institution for the individual identification of each asset in the cover pool at all times and for the verification of compliance with the eligibility conditions of each of them.

The valuation of the collateral assets for the coverage must be performed at the time of their inclusion in the cover pool and thereafter on an annual basis. The cover pool must always include a liquidity buffer comprising of liquid assets of high credit quality.

The RDL also covers the information to be provided by issuers on their covered bond programmes, enabling investors to carry out a due diligence process based on their profile and risk.

With regard to the supervisory regime for covered bonds, the RDL entrusts it, on the one hand, to a cover pool monitor for the coverage as a whole, as an investor protection mechanism. The purpose of which is to permanently monitor compliance with the requirements for the coverage as a whole, and, on the other hand, to the Bank of Spain, as the supervisory authority for covered bond programmes.

Finally, it should be noted that the RDL establishes that in the event of insolvency of the covered bond issuer, the assets comprising of the cover pool will be segregated from its assets and will form a separate estate without legal personality. It will operate in legal transactions represented by the special administrator appointed to administer the covered bond programme in the insolvency proceedings.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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