Royal Decree of 11 October 2012 concerning the issuance of Belgian covered bonds by Belgian credit institutions

Title

2012003307

11 OCTOBER 2012. - Royal Decree concerning the issuance of Belgian covered bonds by credit institutions under Belgian law (NOTE: Consultation of previous versions from 18-10-2012 and text update until 15-02-2022)

Source: Finance

Publication: 18 October 2012

Number: 2012003307

Page: 63448

File Number: 2012-10-11/02

Entry into force: 18 October 2012

1 archived version

1 implementing decree

Art. 1-10
Art. 10 FUTURE LAW
Art. 11-16

Text

Article 1.[[1](#t

Art. 6. Valuation of coverage assets
§ 1. In the context of the tests referred to in Article 5, paragraphs 1 and 2, the value of the coverage assets is determined in paragraphs 2 to 9.
§ 2. For the debt claims referred to in Article 3, § 1, category 1, the value of the coverage asset is equal to the smallest of the following amounts:

the amount of those debt claims,
80% of the sale value of the non-commercial real estate provided as security,
the value of the mortgage, as determined below.
When the subject of the mortgage is non-commercial real estate located in Belgium, the value of the mortgage is equal to the amount of the first-rank mortgage registration, supplemented, where applicable, by the amount of mortgages in successive ranks, provided that no other creditors are in an intermediate position.
When the mortgage is supplemented with a mortgage mandate, the value of the mortgage is equal to the lowest of the following two amounts:
a) the amount of the first-rank mortgage registration, supplemented, where applicable, by the amount of mortgage registrations in successive ranks, provided that no other creditors are in an intermediate position, and by the amount for which a mortgage mandate is granted, and b) the amount of the first-rank mortgage registration, supplemented, where applicable, by the amount of mortgage registrations in successive ranks, provided that no other creditors are in an intermediate position, divided by 0.6. When the subject of the mortgage is non-commercial real estate located outside Belgium, the value of the mortgage is equal to the amount of the first-rank mortgage registration, supplemented, where applicable, by the amount of mortgages in successive ranks, provided that no other creditors are in an intermediate position. Mortgage mandates must not be taken into account. Non-commercial real estate may only be taken into account in the valuation calculation if the requirements of Article 208 of Regulation No. 575/2013 are met. In accordance with paragraph 3, point a) of the aforementioned Article 208, the value of the non-commercial real estate is monitored regularly and at least annually. The calculation of the 80% limit referred to in the first paragraph is calculated separately for each loan and determines the portion of the loan that contributes to the coverage of the obligations linked to the relevant Belgian covered bond, and applies for the entire duration of the loan. § 3. For the debt claims referred to in Article 3, § 1, category 2, the value of the coverage asset is equal to the smallest of the following amounts:
the amount of those debt claims,
60% of the sale value of the commercial real estate provided as security,
the value of the mortgage, as determined below.
When the subject of the mortgage is commercial real estate, the value of the mortgage is equal to the amount of the first-rank mortgage registration and, where applicable, the amount of mortgages in successive ranks, provided that no other creditors are in an intermediate position. Mortgage mandates must not be taken into account.
Commercial real estate may only be taken into account in the valuation calculation if the requirements of Article 208 of Regulation No. 575/2013 are met. In accordance with paragraph 3, point a) of the aforementioned Article 208, the value of the commercial real estate is monitored regularly and at least annually.
The calculation of the 60% limit referred to in the first paragraph is calculated separately for each loan and determines the portion of the loan that contributes to the coverage of the obligations linked to the relevant Belgian covered bond, and applies for the entire duration of the loan.
§ 4. If a mortgage covers multiple debt claims and not all debt claims are included in the special property, the value of the mortgage and the sale value of the encumbered real estate are attributed to the debt claim that qualifies as coverage, based on the priority rules established in the issuance conditions of the Belgian covered bonds, to determine the value of the coverage assets, as referred to in paragraphs 2 and 3. § 5. The value of the coverage assets referred to in Article 3, paragraph 1, category 3 is equal to the amount of those assets recorded in the consolidated financial statements of the issuing credit institution. Where applicable, however, the value is limited to the amount guaranteed by the counterparties falling under this category. § 6. ... § 7. ... § 8. The derivative contracts referred to in Article 4 are valued for the calculation of the requirements of Article 5, paragraphs 1 and 2, based on the amount payable upon termination of the derivative contract ("close-out amount"). § 9. The value of the coverage assets referred to in Article 3, § 1, 4° (category 4), a), is determined based on the amount of those assets recorded in the financial statements of the issuing credit institution. § 10. For the purposes of Article 5, paragraphs 1 to 3, the contribution (principal and income) of a coverage asset for which there is a default as defined in Article 178 of Regulation No. 575/2013 is zero. A coverage asset for which a payment delay of more than 30 days has been established is taken into account at 50% of its value as determined in accordance with this article and Article 5, paragraph 3. The number of overdue days is calculated in accordance with the provisions of Article 178 of Regulation No. 575/2013.

Art. 7. Liquidity buffer
§ 1. Each special property must contain sufficient liquid and available coverage assets to form a liquidity buffer, in order to enable the issuing credit institution to cover at all times the net liquidity outflows of the relevant issuance or issuance program, as well as the maximum amount of the sum of net liquidity outflows calculated over a period of six months. If the conditions for the issuance of Belgian covered bonds provide for a roll-over structure, the calculation of the principal may be based on the maximum maturity set in the issuance conditions. In the context of the calculation of the liquidity buffer and net liquidity outflows, the contribution (principal and income) of a coverage asset for which there is a default as defined in Article 178 of Regulation No. 575/2013 is zero. Similarly, in the context of the calculation of the liquidity buffer and net liquidity outflows, the contribution (principal and income) of a coverage asset for which a payment delay of more than 30 days has been established is taken into account only up to 50% of its value. The number of overdue days is calculated in accordance with Article 178 of Regulation No. 575/2013. § 2. The liquidity buffer referred to in paragraph 1 includes:
1° coverage assets that meet the requirements regarding Level 1 assets in accordance with Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to the liquidity coverage requirement for credit institutions, which are valued in accordance with that delegated regulation and which have not been issued by the credit institution that issued the relevant Belgian covered bonds, nor by its parent undertaking, unless it is a public law entity that is not a credit institution, its subsidiary, or another subsidiary of its parent undertaking; 2° short-term exposures or short-term deposits as referred to in Article 3, 4°, a). § 3. If the credit institution no longer meets the requirement referred to in paragraph 1, it must take the necessary remedial measures within fourteen days to comply again. As long as it has not taken the necessary measures to comply with the requirement of paragraph 1, the relevant credit institution may not issue any new Belgian covered bonds, either individually or under a program. § 4. ...

Art. 8. Risk management
The issuing credit institution must establish a risk management policy and conduct stress tests at least every three months to ensure that the cash flows generated by the coverage assets remain sufficiently large to meet the requirements of Articles 5 and 7 and/or must have other assets available that can be used as coverage assets if necessary. The stress tests must take into account at least:

sudden and unexpected interest rate or exchange rate movements;
scenarios with different levels of percentages of early repayment of coverage assets;
scenarios with a significant deterioration in the credit quality of the coverage assets.

Art. 9. Register of coverage assets
§ 1. If a credit institution issues Belgian covered bonds, it must keep at its registered office for each issuance or issuance program a register of the coverage assets and the relevant Belgian covered bonds. The issuing credit institution must enter the coverage assets relating to an issuance or issuance program into this register without delay. A coverage asset and a Belgian covered bond may only be entered in a single register. Once the assets or coverage instruments are entered in the register of coverage assets, they form part of the coverage assets. The fact that they form part of the coverage assets is valid and enforceable against third parties once this entry has been made. The amounts paid as repayment, recovery, or payment of interest on the debt claims or assets referred to in Article 3, paragraph 2, are deemed to be entered in the register insofar as that debt claim or asset is entered, and this applies until the time these amounts are used. § 2. The register must contain at least the following information:
1° the characteristics per series of the issued Belgian covered bonds, including their nominal value, their maturity date, their interest rate(s); 2° the characteristics of the assets that form the coverage assets, including the category, the type of contract, the nominal amount, the currency, the issuance date and maturity date of the assets, the date of entry in this register, the identification of the counterparties, information on repayment, interest rates, security, and valuation. § 3. If a specific characteristic of an asset is changed, the new characteristic must be entered in the register without delay. § 4. All information included in the register must be verifiable by the portfolio supervisor. The contracts relating to the assets entered in the register, including the security contracts and mortgages, must be identifiable based on the register and easily accessible. § 5. The register is maintained in electronic form. Only persons authorized by the statutory governing body and who exclusively perform functions in business units not involved in granting the underlying loans may make entries in the register and make changes to it. Protective measures must be taken to prevent the register from being modified by unauthorized persons or, where applicable, damaged or destroyed. To this end, an updated copy (backup) of the register must be created and stored in a different protected location than the original register. The National Bank may establish the rules applicable to the register, particularly regarding the technical modalities, form, and content thereof. § 6. When a coverage asset is deleted from the register of coverage assets, it no longer belongs to the special property.

Art. 10. Limitation on the amount of Belgian covered bonds to be issued § 1. Unless prior authorization from the National Bank is obtained, a credit institution may not issue any more covered bonds if the amount of the coverage assets is higher than 8% of the total of its assets. The National Bank may determine which assets must be taken into account for this limit and how these assets must be valued. The prior authorization from the National Bank, as referred to in the first paragraph, may only be granted temporarily if justified by exceptional circumstances on the financial markets that affect the relevant credit institution and justify the use of this funding source on a larger scale. The National Bank sets the deadline by which compliance with the 8% limit referred to in the first paragraph must be restored. When the credit institution issues covered bonds whose coverage assets are loans initially granted by other credit institutions or financial institutions of the same group, the aforementioned 8% limit may be assessed based on all assets of the relevant institutions. This option may only be used if the National Bank has granted prior authorization for this purpose. § 2. Notwithstanding the provisions of paragraph 1, the National Bank may require the issuing credit institution to limit the volume of its issuance of Belgian covered bonds, in particular to protect other creditors of the credit institution other than holders of Belgian covered bonds and, where applicable, equivalent securities, without prejudice to compliance with the legal and contractual provisions regarding the issued Belgian covered bonds and, where applicable, equivalent securities.

Art. 10 FUTURE LAW. Limitation on the amount of Belgian covered bonds to be issued The National Bank may require an issuing credit institution to limit the volume of its issuance of Belgian covered bonds to protect other creditors of the credit institution other than holders of Belgian covered bonds.

Art. 11. Portfolio Supervisor § 1. For each issuance or each issuance program of Belgian covered bonds, the issuing credit institution shall appoint a portfolio supervisor. This supervisor may act for several issuances or issuance programs of the credit institution.
[2 The request for the unanimous opinion referred to in Article 16, § 1, of Annex III of the Act shall be included in the file for the application for permission to issue Belgian covered bonds, as provided for in Article 81, § 1, of the Act.]2 § 2. In principle, this agreement applies for the full term of the issuance program(s). Before the credit institution dismisses the supervisor from his duties, it must obtain the unanimous opinion of the Bank. If a supervisor resigns, the Bank must be notified in advance. The resignation takes effect only after this notification. § 3. [2 The portfolio supervisor is an auditor or audit firm recognized by the Bank pursuant to Article 222 of the Act of 25 April 2014, and is not the commissioner appointed at the issuing credit institution pursuant to Article 223 of the said Act. The supervisor also possesses the necessary qualifications and experience to fulfill the tasks established by the Act and this Decree.]2 § 4. Before the credit institution issues a Belgian covered bond, the portfolio supervisor reports to the Bank on the results of the work he has carried out to determine whether the issuing credit institution can meet the requirements:
1° [2 regarding coverage assets, namely the qualitative requirements relating to coverage assets, the quantitative requirements relating to coverage assets, the valuation requirements, the level of coverage, the surplus and available liquidity, the requirements for the purchase of assets to cover an issuance, and the requirements relating to derivative contracts, as determined in this Decree where applicable;]2 2° [2 regarding ring-fencing, investor disclosure, extendible maturity structures, and maintenance of the register of coverage assets, specifically the requirement for correct registration.]2 Furthermore, the portfolio supervisor fulfills specific tasks requested by the Bank. § 5. After the issuance of the Belgian covered bonds, the portfolio supervisor carries out these verifications at least once a year. If the supervisor finds that the issuing credit institution does not comply with the requirements referred to in paragraph 4, he immediately informs the Bank and the issuing credit institution thereof. With derogation from the first paragraph, the portfolio supervisor checks at least once a month whether the requirements of Articles 5, 7 and 9 are met regarding the [1 coverage assets]1. § 6. If the portfolio supervisor finds that the issuing credit institution no longer complies with the requirements referred to in paragraph 4 or with other requirements imposed by the Act or this Decree, he immediately informs the Bank and the issuing credit institution thereof. § 7. Once a year, the supervisor sends a report to the Bank communicating the conclusions of the work he has performed in accordance with paragraph 5. The Bank may specify the content of this report, as well as the deadline for its submission.

(1)<KB 2022-01-27/15, art. 3, 002; Inwerkingtreding : 08-07-2022> (2)<KB 2022-01-27/15, art. 13, 002; Inwerkingtreding : 08-07-2022>

Art. 12.[1 Investor Disclosure § 1. For the application of Article 15/1, § 1, of Annex III of the Act, each credit institution issuing Belgian covered bonds publishes separately for each issuance program the following information on its website within the month following the issuance and subsequently every month for information relating to the previous month:
1° the results of the three coverage tests referred to in Article 5, including the amounts of the items taken into account for the calculation of those tests; 2° the results of the liquidity test referred to in Article 7, including the amounts of the items taken into account for the calculation of that test, the composition of the liquidity buffer and a description of the assets forming part of this buffer; 3° for the coverage assets, the distribution and the outstanding amounts for each category of claims referred to in Article 3 and within each of these categories of assets, in light of the following criteria:

the currencies;
the characteristics of the interest rate determination for the underlying credits;
the distribution of the interest rates for the underlying credits;
the distribution of the underlying credits based on the period since the issuance of the credit ("loan seasoning") and the remaining maturity ("residual maturity");
the distribution of the nominal amounts of the outstanding underlying credits by size, as well as the aggregated nominal amount, the number of borrowers and their contribution to the special property;
partial and full early repayments;
the total outstanding amount of the coverage assets showing a delay of 0 to 30 days, 30 to 60 days and 60 to 90 days relative to all coverage assets;
for the claims of category 1 and 2 referred to in Article 3, the distribution of loans per level of loan-to-value ratio (LTV) and the weighted average of the LTV, each calculated based on the indexed and non-indexed market value on the reference date;
for the claims of category 1 and 2 referred to in Article 3, the distribution of loans in light of their collateralization by a mortgage (amount of the mortgage registration);
for the claims of category 2 referred to in Article 3, the type of commercial real estate on which a mortgage has been taken;
for the claims of category 1 referred to in Article 3, the type of occupation of the non-commercial real estate on which a mortgage has been taken: owner-occupied home, rented home or other;
for the claims of category 3 referred to in Article 3, the status of the borrower;
if the issuing credit institution applies IFRS9 standards, the aggregated outstanding amount and the number of loans classified based on Phase 1, 2 and 3 regarding the categories of impairment as described in Section 9.5.5 of International Financial Reporting Standard 9 - Financial Instruments - and as referred to in Commission Implementing Regulation (EU) 2017/1443 of 29 June 2017 amending Implementing Regulation (EU) No 680/2014 laying down technical standards for reporting to supervisory authorities by institutions pursuant to Regulation (EU) No 575/2013 of the European Parliament and of the Council;
4° the effectiveness of the derivative contracts in light of the accounting risk coverage requirements of Section 6.4 of International Financial Reporting Standard 9 - Financial Instruments; 5° the conformity between the repayment profiles of the Belgian covered bonds and the related coverage assets, taking into account the different levels of early repayment of those assets. § 2. Similarly, the issuing credit institutions publish on their website every quarter the results of the stress tests referred to in Article 8 relating to the requirements referred to in Article 5 and in Article 7.]1

(1)<KB 2022-01-27/15, art. 14, 002; Inwerkingtreding : 08-07-2022>

Art. 13.
<Repealed by KB 2022-01-27/15, art. 15, 002; Inwerkingtreding : 08-07-2022>

Art. 14.
<Repealed by KB 2022-01-27/15, art. 15, 002; Inwerkingtreding : 08-07-2022>

Art. 15. This Decree enters into force on the day it is published in the Belgian Official Journal.

Art. 16. The Minister responsible for Finance is charged with the implementation of this Decree.

Signature

Given at Brussels, 11 October 2012.
ALBERT
By the King:
The Minister of Finance,
S. VANACKERE

Preamble

ALBERT II, King of the Belgians,
To all who are present and hereafter shall be, our Greeting.
Having regard to the Act of 22 March 1993 on the status and supervision of credit institutions, Articles 64/3, § 4, 64/7, § 1 and § 3, 64/18, 64/20, § 3 and 64/21, § 3, inserted by the Act of 3 August 2012; Having regard to the opinion of the Inspector of Finance, given on 18 September 2012; Having regard to the approval finding of the Minister of Budget, given on 26 September 2012; Having regard to the request for expedited handling, motivated by the fact that Belgium is the only country in Europe where no legal framework exists for the issuance of covered bonds and credit institutions under Belgian law consequently suffer a very strong disadvantage compared to their foreign competitors when they wish to finance themselves at a reasonable cost on a long-term basis so that they would be able to provide credit to enterprises and families at reasonable costs, also on a long-term basis; that this legal framework has already been partially created by the Act of 3 August 2012 and must be completed by this Royal Decree before covered bonds can effectively be issued; Having regard to Opinion 52.126/2 of the Council of State, given on 8 October 2012, pursuant to Article 84, § 1, first paragraph, 2°, of the laws on the Council of State, coordinated on 12 January 1973; On the proposal of the Minister of Finance and on the advice of the Ministers meeting in Council, Have decided and decide:

Amendment(s)

Royal Decree of 27-01-2022 published on 15-02-2022

Amended articles :
NL1; 2; 3; 6; 7; 9; 10; 11; 4; 5; 8; 12; 13; 14

Report to the King

REPORT TO THE KING

Sire,

The draft royal decree submitted to You for signature falls within the framework of the introduction of the statutory scheme for Belgian covered bonds as established by the Law of 3 August 2012, which was published in the Belgian State Gazette of 24 August 2012. It aims to clarify certain provisions of the statutory text and to frame its implementation.

The primary objective of the law regarding covered bonds is to facilitate the refinancing of credit institutions while simultaneously introducing appropriate legal mechanisms to protect holders of such debt instruments.

The key feature of the protection mechanism for covered bond holders is the creation of a special portfolio, consisting of cover assets, which is segregated from the general assets of the credit institution issuing the covered bonds. The law pays particular attention to the cover assets and introduces minimum conditions regarding their nature, primarily limiting them to mortgage claims and claims on public law entities. The draft royal decree establishes the quantitative and qualitative criteria determining whether an asset may be used as a cover asset, imposes limits per category of assets, and determines the minimum cover level for covered bonds.

The royal decree specifically establishes the nature and valuation of the cover assets, as well as the minimum rules for the cover of covered bonds. These rules are established so that Belgian covered bonds can meet the criteria determining whether an asset qualifies as a cover asset, as set out in Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 on the taking up and pursuit of the business of credit institutions. Meeting these criteria should ensure that investors can more easily invest in covered bonds and that these instruments are taken into account in the context of the European Central Bank's monetary financing transactions.

The royal decree also establishes the rules for maintaining the register of cover assets and regarding the cover pool supervisor.

The law regarding covered bonds authorizes the King to establish the powers and criteria on which the National Bank of Belgium can rely to determine, for each issuing credit institution, the maximum percentage of Belgian covered bonds it may issue relative to its total balance sheet. In this regard, the draft royal decree limits the amount of cover assets that may be held for covered bonds to 8% of the assets of the issuing credit institution. This provision aims to take into account the fact that covered bonds not only allow credit institutions to diversify their long-term funding sources but also raise concerns regarding the use of assets of credit institutions issuing covered bonds to the detriment of unsecured depositors.

The opinion of the Council of State has been taken into account. In response to its comments regarding the absence of a sustainable development impact assessment, it can be stated that Article 19/1 of the Law of 5 May 1997, inserted by the Law of 30 July 2010, has not yet been implemented. A draft royal decree regulating the impact assessment and determining exemptions from this assessment is currently being prepared.

Therefore, only existing guidelines regarding the SDIA test can be relied upon, and it has been decided that the exemption due to the self-regulation of the federal government can be invoked.

Commentary on the Articles

Article 1
Article 1 defines the scope of application of the decree.

Article 2
Article 2 contains a list of definitions.

Article 3
Article 3 establishes the criteria determining whether an asset may be used as a cover asset. There are five categories of assets that qualify as cover assets.

The first two categories concern mortgage claims that must be secured by a first-ranking mortgage, the basis of which is non-commercial or commercial real estate located in a member state of the European Economic Area, without prejudice to the recognition of mortgages in successive ranks, provided that no other creditors are in an intermediate position.

The third category concerns primarily claims on central governments, central banks, and public law entities of OECD member states.

Participation certificates issued by securitization entities may also qualify as cover assets. The draft text, however, limits the qualifying participation certificates to transactions concerning the securitization of claims issued by an entity belonging to the same group as the credit institution issuing the covered bonds. This provision aims to ensure that the issuing institution has the necessary information to verify that the underlying claims of the relevant securitization transactions actually meet the criteria determining which assets qualify.

In total, 85% of the qualifying cover assets must consist of mortgage claims on non-commercial or commercial real estate, claims on governments or public law entities of OECD member states, or securitization participation certificates concerning claims of the same nature allocated within the group to which the credit institution issuing the covered bonds belongs.

The remaining 15% may consist of the fourth and fifth categories; these concern claims on credit institutions and positions arising from hedging instruments linked to the cover assets and the issued covered bonds.

Article 4
Article 4 stipulates that the institution may include hedging instruments in the cover assets provided that these instruments are exclusively intended to hedge interest rate or exchange rate risks, or other risks, associated with the assets registered as hedging instruments or with the relevant Belgian covered bonds. This results in these hedging instruments becoming part of the special portfolio(s) in which the cover assets are segregated, which is separate from the general assets of the issuing credit institution. This separation avoids exposing covered bond holders to unexpected interest rate or exchange rate risks. The article also stipulates that the default risk of the counterparties to the hedging instruments must be low to provide sufficient protection to covered bond holders.

Article 5
Article 5 describes the two tests regarding the minimum cover of covered bonds.

The first test requires that at least 85% of the qualifying cover assets must consist of mortgage claims on non-commercial or commercial real estate, claims on governments or public law entities of the OECD, or securitization participation certificates concerning claims of the same nature allocated within the group to which the credit institution issuing the covered bonds belongs. This standard also ensures that Belgian covered bonds meet the criteria determining whether an asset may be used as a cover asset, as set out in Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 on the taking up and pursuit of the business of credit institutions.

The article further stipulates that the cover assets must have a value equal to at least 105% of the nominal value of the issued covered bonds to provide sufficient protection to covered bond holders.

Article 6
For the verification of the tests provided for in Article 5 of the royal decree, it is important to specify the rules for the valuation of the cover assets. Thus, Article 6 stipulates that for mortgage claims, the value to be taken into account is the smallest amount between the claim amount as recorded in the accounting of the issuing institution, 80% of the sales value of non-commercial real estate, 60% of the sales value of commercial real estate, and the mortgage value. The text also specifies the extent to which mortgage mandates are taken into account when they concern non-commercial real estate.

Since these provisions could raise technical questions, the Bank will prepare a circular that will specifically describe the valuation methods in more detail. In particular, for claims secured by real estate, the circular will establish a ceiling below which the notarial deed or the valuation by an architect may be used to justify the original value of the real estate. The circular will also make it possible in this case to use representative market indexes for periodic revaluations.

Regarding claims on or secured by governments, central banks, or public sector entities, the draft text specifies that their value is equal to zero when the counterparties to these claims are located outside the European Union, unless they meet the criteria and limits determined by Directive 2006/48/EC regarding assets that qualify as cover assets for covered bonds that may benefit from a favorable weighting in terms of own funds.

Claims on credit institutions are recorded at their book value, provided that the counterparty can benefit from a weighting in own funds of category 1 or 2, applying Annex VI of the aforementioned Directive 2006/48/EC. If this is not the case, the claim is not taken into account for the verification of the tests provided for in Article 5. This rule also aims to ensure that the covered bonds meet the criteria determining whether an asset may be used as a cover asset, as set out in Directive 2006/48/EC.

Article 7
According to the law regarding covered bonds, the issuance conditions must provide mechanisms ensuring that the Belgian covered bond is repaid within the established term. To achieve this objective, Article 7 stipulates that the reserves in cash (and other liquidities) generated over a period of six months by the cover assets must be sufficient to cover the payments that must be made in accordance with the issuance conditions during this period. These are liquidity tests ensuring that matching obligations are established between the flows generated over a certain period by the cover assets and the obligations that must be fulfilled with respect to the holders of covered bonds.

Article 8
From the same perspective as Article 7, Article 8 imposes the obligation to limit interest rate and exchange rate risks that may arise from asymmetries between the cover assets and the issued covered bonds.

Article 9
This article contains the minimum requirements for maintaining the register of cover assets. Due to the separation between the general assets of the issuing credit institution and the special portfolio(s) in which the cover assets are segregated, it is important that the cover assets can be accurately identified. The article specifies the minimum information with which the cover assets must be identifiable.

Article 10
The law regarding covered bonds authorizes the King to establish the powers and criteria on which the National Bank of Belgium can rely to determine, for each issuing credit institution, the maximum percentage of Belgian covered bonds it may issue relative to its total balance sheet.

In this regard, the draft royal decree limits the amount of cover assets that may be held for covered bonds to 8% of the assets of the issuing credit institution. This provision aims to take into account the fact that covered bonds not only allow credit institutions to diversify their long-term funding sources but also raise concerns regarding the use of assets of credit institutions issuing covered bonds to the detriment of unsecured depositors.

In applying the 8% limit, however, specific situations must be taken into account, particularly when a group chooses to establish an ad hoc credit institution to issue covered bonds. Since all assets of the ad hoc credit institution serve as cover assets for the covered bonds, the limit in that case must be calculated based on the consolidated position of the group.

Furthermore, the limit must not prevent a credit institution that has already issued covered bonds from allocating cover assets to the special portfolio to meet its contractual or legal obligations, or if this proves necessary to maintain its credibility in the market. When the limit is exceeded, the consequences must therefore be limited to a restriction on the ability to proceed with new issuances.

Furthermore, the draft text grants the National Bank of Belgium the authority to grant temporary exemptions regarding the application of the limit established by the royal decree in exceptional and duly justified circumstances, such as lack of access to the unsecured funding market. The exceptional and temporary nature of this exemption authority prevents the granting of a deviation that would allow an institution to develop its activities through the issuance of covered bonds.

The draft text retains the possibility for the National Bank of Belgium to be more restrictive if deemed necessary. Such a need could be justified if the credit institution has already used other funding sources with collateral or if the institution is in a state where a possible liquidation must be taken into account.

To assess the position of credit institutions regarding the limit established by the royal decree, the National Bank should describe in a circular what information it expects from credit institutions issuing covered bonds regarding their liquidity policy and measures aimed at ensuring appropriate diversification of funding sources, as well as the holding of a reserve of available assets that can be used as cover assets.

Article 11
This article specifies the duties of the cover pool supervisor designated by the credit institution, whose role is to report on compliance with the provisions regarding cover assets.

For the appointment of a cover pool supervisor, the unanimous opinion of the National Bank of Belgium is required. In addition, the person concerned must meet certain competence requirements. The supervisor must possess the recognition as an auditor (or audit firm) issued by the National Bank of Belgium at the credit institution, and, to avoid any conflict of interest, he may not combine the mandate of supervisor with that of the commissioner of the credit institution issuing covered bonds.

Article 12
The issuing credit institution must submit a report to the Bank every three months. This article grants the Bank the authority to describe the content of this report in a circular or regulation.

Article 13
This article stipulates that covered bonds meeting the conditions of this draft decree are deemed to comply with the regulations on the own funds of credit institutions, thereby benefiting from a favorable own funds weighting.

Article 14
This article stipulates that the Bank may establish the technical modalities for the application of various articles, in particular to ensure uniform application of the rules for the valuation of assets, the liquidity test, and the calculation of the maximum issuance limit set out in Article 10 among the issuing credit institutions. In this regard, and without prejudice to Articles 11 and 12, the Bank may determine which specific reports the institutions and the cover pool supervisor must submit to ensure that the relevant technical modalities are complied with.

Article 15
This article specifies the date of entry into force of the royal decree.

Article 16
This article designates the minister responsible for the implementation of this decree.

I have the honor to be,
Sire,
Your Majesty's, very respectful and very faithful servant,

The Minister of Finance,
S. VANACKERE

ADVISORY OPINION 52.126/2 OF 8 OCTOBER 2012 OF THE COUNCIL OF STATE, LEGISLATIVE DIVISION, ON A DRAFT ROYAL DECREE CONCERNING THE ISSUANCE OF BELGIAN COVERED BONDS BY CREDIT INSTITUTIONS GOVERNED BY BELGIAN LAW

On 1 October 2012, the Council of State, Legislative Division, was requested by the Deputy Prime Minister and Minister of Finance to provide an opinion within a period of five working days on a draft Royal Decree 'concerning the issuance of Belgian covered bonds by credit institutions governed by Belgian law'.

The draft was examined by the second chamber on 8 October 2012. The chamber was composed of Yves Kreins, chamber president, Pierre Vandernoot and Martine Baguet, councillors of state, Sébastien Van Drooghenbroeck, assessor, and Bernadette Vigneron, clerk.

The report was delivered by Jean-Luc Paquet, first auditor.

The agreement between the French and Dutch texts of the opinion was reviewed under the supervision of Pierre Vandernoot.

The opinion, the text of which follows below, was given on 8 October 2012.

Pursuant to Article 84, § 1, first paragraph, 2°, of the coordinated laws on the Council of State, inserted by the law of 4 August 1996 and replaced by the law of 2 April 2003, the reasons justifying the urgent nature of the request must be indicated in particular in the request for opinion.

In the present case, this justification in the letter accompanying the request for opinion reads as follows:

"The urgency is motivated for the first decree by the fact that Belgium is the only country in Europe where no legal framework exists for the issuance of covered bonds and that credit institutions governed by Belgian law have a significant disadvantage compared to their foreign competitors when they seek to finance themselves long-term and at a reasonable cost and subsequently grant loans to businesses and households; that this legal framework is already partially created by the law of 3 August 2012 and must be completed by the present Royal Decree before covered bonds can be effectively issued; for the second decree, by the fact that the law of 3 August 2012 and the Royal Decree have created a legal framework for the issuance of Belgian covered bonds in order to avoid that credit institutions governed by Belgian law have a significant disadvantage compared to their foreign competitors when they seek to finance themselves long-term and subsequently grant loans to businesses and households; that this long-term financing can only be done at a reasonable cost on condition that this legal framework is completed by the present Royal Decree, given that rating agencies, when setting the rating of covered bonds, take into account among other things the requirements valid for the designation of a portfolio manager, as well as the specific tasks and reporting obligations incumbent on him."

Since the request for opinion was submitted on the basis of Article 84, § 1, first paragraph, 2°, of the coordinated laws on the Council of State, as replaced by the law of 2 April 2003, the Legislative Division, in accordance with Article 84, § 3, of the aforementioned coordinated laws, limits its examination to the legal basis of the draft, the competence of the author of the act, and the prior formal requirements to be fulfilled.

With regard to these three points, the draft gives rise to the following comments.

Prior Formal Requirement

By a law of 30 July 2010, which entered into force on 1 October 2011 (1), provisions concerning impact assessment in the field of sustainable development were inserted into the law of 5 May 1997 'concerning the coordination of federal policy on sustainable development'.

The legislator defined the "impact assessment" as "sustainable development impact assessment, being the method for studying possible social, economic and environmental effects, as well as the effects on the revenues and expenditures of the State, of a proposed policy in the short, medium and long term in and outside Belgium before the final decision is taken" (2).

In this context, the following regulation was introduced:

1° in principle, every preliminary draft law, every draft Royal Decree and every draft decision that must be submitted for approval to the Council of Ministers must give rise to a prior examination regarding the necessity of carrying out an impact assessment (3), the only cases in which such a prior examination need not take place are those to be determined by a Royal Decree adopted after consultation in the Council of Ministers (4), which decree, at the current state of the texts published in the Belgian State Gazette, has not yet been issued;

2° when the prior examination shows that an impact assessment is required, the aforementioned assessment must be carried out (5);

3° compliance with the procedure thus prescribed is a condition, depending on the case, for submitting a bill to the Legislative Chambers, for issuing a Royal Decree, or for approving a draft decision by the Council of Ministers (6).

In the present case, it cannot be inferred from any of the documents sent to the Council of State that the procedure described above was followed, more specifically whether it was previously examined whether it was necessary to carry out an impact assessment.

The drafter of the draft must ensure that this formal requirement is fulfilled and that the preamble of the draft is supplemented in this sense.

Special Comments

Preamble

Apparently, the second paragraph of the preamble must be deleted. Article 12bis, § 2, of the law of 22 February 1998 'establishing the organic statute of the National Bank of Belgium', inserted by Article 187 of the Royal Decree of 3 March 2011 'concerning the evolution of the supervisory architecture for the financial sector', the first paragraph of which states that the National Bank may establish regulations in supervisory matters for which it is competent to supplement the relevant legal or regulatory provisions concerning technical points, contains in its third paragraph only the following authorizations, which have nothing to do with the draft Royal Decree on which this opinion is given:

"These regulations only take effect after approval by the King and their publication in the Belgian State Gazette. The King may make changes to these regulations or establish these rules himself if the Bank has not established a regulation."

That some provisions of the draft, such as Article 14, provide for the possibility for the National Bank of Belgium to establish the technical rules for the application of several designed rules, is only a repetition of Article 12bis, § 2, first paragraph, of the aforementioned law of 22 February 1998, without this therefore being considered as a legal basis for the draft decree.

Dispositive Part

Article 3

With regard to claims against central, regional or local authorities, central banks or public entities, or with regard to claims secured or guaranteed by such authorities, central banks or entities, claims that can form the collateral values of Belgian covered bonds, Article 64/3, § 3, 2°, b), of the law of 22 March 1993 'on the status of and supervision of credit institutions' stipulates that it must concern authorities, central banks or entities of "Member States of the OECD".

In Article 3, § 1, 3°, a) and b), of the draft, reference is made only to "Member States of the European Economic Area that are members of the OECD".

Explanation must be provided in the report to the King regarding this difference.

Article 5, § 1, of the draft reads as follows:

"The valuation of the collateral values of one of the first three categories referred to in Article 3, paragraph 1, must be at least equal to 85% of the nominal amount of the relevant Belgian covered bonds and, if applicable, of the securities equivalent thereto."

In Article 3, § 3, reference is made to this provision in the following wording:

"Unless specific permission is granted by the Bank and without prejudice to the provisions of paragraph 2, the collateral values taken into account for the calculation of the ratio of 85% referred to in Article 5, paragraph 1, may consist of only one of the first three categories of assets referred to in paragraph 1."

The two aforementioned texts apparently do not match because the last cited provision offers the possibility to deviate from the requirement that the collateral values taken into account for the calculation of the ratio of 85% of the nominal amount of the relevant Belgian covered bonds and, if applicable, of the securities equivalent thereto, may consist of only one of the first three categories referred to in Article 3, § 1, a deviation that takes the form of specific permission granted by the National Bank.

The drafter of the draft must provide an explanation on this matter and, if necessary, revise the draft on this point.

Article 6

In paragraphs 2, fifth paragraph, and 3, third paragraph, reference is made to "Annex VIII, Part 2, point 8" and to "Annex VIII, Part 3, points 62 to 65" of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 'on the taking up and pursuit of the business of credit institutions', "as transposed into Belgian law".

Instead of referring to the provisions of the directive in this way, reference must be made to the provisions of Belgian law by which those provisions have been transposed.

(1) According to Article 4 of the law of 30 July 2010 "(this law) enters into force on the first day of the twelfth month after the one in which it was published in the Belgian State Gazette". Because the law of 30 July 2010 was published on 14 October 2010, it follows that this law entered into force on 1 October 2011.

(2) Article 2, 9°, of the law of 5 May 1997.

(3) Article 19/1, § 1, first paragraph, of the law of 5 May 1997. By Article 19/1, § 2, of the law of 5 May 1997, the King is tasked with regulating the prior examination by a decree adopted after consultation in the Council of Ministers. To date, no decree with such a subject has been published in the Belgian State Gazette.

(4) Article 19/1, § 1, second paragraph, of the law of 5 May 1997.

(5) Article 19/2 of the law of 5 May 1997. By this provision, the King is tasked with regulating the impact assessment by a decree adopted after consultation in the Council of Ministers. To date, no decree with such a subject has been published in the Belgian State Gazette.

(6) Article 19/3 of the law of 5 May 1997.

The President,
Y. Kreins.

The Clerk,
B. Vigneron.