A draft bill (7822/00) relating to the issuance of covered bonds was recently deposited to implement EU Directive 2019/2162/EU 1 into Luxembourg law.
The EU directive establishes an EU-wide framework for covered bonds, which strengthens investor protection rules regarding the requirements for:
the issuance of covered bonds;
the structural characteristics of covered bonds;
the public supervision of covered bonds; and
publication obligations relating to covered bonds.
The existing legal framework for covered bonds in Luxembourg already largely complies with the EU directive's requirements. Nevertheless, the draft bill introduces several innovations. Notably, it introduces a product-centric approach to the issuance of covered bonds by allowing all Luxembourg credit institutions to issue such covered bonds within certain limits.
It will no longer be required to establish a dedicated credit institution ('Spezialbankenprinzip') to issue covered bonds, although the specific regime of dedicated banks issuing covered bonds will continue to exist.
The draft bill provides for two categories of covered bond:
covered bonds under general law (ie, national covered bonds); and
covered bonds which meet the additional specific requirements which arise from the EU directive and which will be able to use the label 'European Covered Bond'.
Covered bonds are generally considered sources of stable refinancing, even in tense market conditions. Access to this activity will enable issuing credit institutions to diversify their sources of financing and strengthen their resilience to market shocks, thus contributing to the stability of such institutions and the Luxembourg banking system in general.
(1) EU Directive 2019/2162/EU on the issue of covered bonds and covered bond public supervision and amending EU Directives 2009/65/EC and 2014/59/EU and EU Regulation 2019/2160 amending EU Regulation 575/2013 as regards exposures in the form of covered bonds.