New law on the issue of covered bonds

What’s new? Access to the activity of covered bond issuance is now open to any Luxembourg credit institution, within a strict framework set out in the Luxembourg Law of 8 December 2021 (“Law" – available in French), which transposes Directive (EU) 2019/2162 of 27 November 2019 on the issue of covered bonds and covered bond public supervision (“Directive”).

The Law amends the Law of 5 April 1993 on the Financial Sector, as amended ("LFS") and certain other relevant financial sector laws.

The current regime for specialised credit institutions issuing covered bonds will continue in parallel with the new regime set up by the Law. The Directive does not exclude the maintenance of the specific national regimes already put in place.

Why is it important? The Law allows any Luxembourg credit institution (“banque universelle”) to exercise the activity of issuing covered bonds, without requiring the establishment of a specialised credit institution whose main purpose is the issuance of covered bonds ("banque d’émission de lettres de gage"), as is the case under the former legislation.

What does it mean? The Law provides that a bank may carry out the activity of issuing covered bonds (i) if it issues covered bonds within the meaning of Art. 1, point 2ter-1 of the LFS or (ii) if it is a bank governed by Luxembourg law, other than a bank issuing covered bonds, which has put in place the necessary measures to ensure that the total of the covered funds linked to the letters of pledge issued does not exceed, at any time, 20 per cent of its total liabilities, including own funds, after deduction of eligible deposits.

Opening up the business of issuing covered bonds to so-called "universal" credit institutions will provide the latter with additional possibilities to cover their financing needs by giving them access to a wider range of refinancing instruments. In particular, covered bonds are considered to be stable sources of refinancing, because they are secured by claims on underlying assets. Access to this activity will thus allow credit institutions issuing such debt securities to diversify their sources of financing, thereby strengthening the stability and soundness of the credit institutions in question.