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    ECB Issues Opinion on Draft Law on Mortgage Banks and Covered Bonds

    August 11, 2021

    In response to a request from the Finnish Ministry of Finance, the European Central Bank (ECB) published an opinion on the draft national law on mortgage banks and covered bonds. The draft law is intended to replace the existing law on mortgage banks and to implement, into the Finnish law, the EU Directive 2019/2162 on covered bonds. The draft law also contains certain provisions that are not required for implementation of the Directive 2019/2162; these provisions are designed to promote competition and harmonize the regulations in this area, in view of the pronounced international and Nordic dimensions of the covered bonds market.

    The vast majority of the draft law’s provisions do not exceed the scope of the Directive 2019/2162 with respect to the ECB’s fields of competence. In Finland, a general banking license does not include authorization to issue covered bonds. A specific authorization is required, which takes the form of an extension to the general banking license. The draft law implements Article 19 of the Directive 2019/2162, which requires permission for a covered bond program to be obtained before issuing covered bonds under it and introduces licensing requirements for issuance of covered bonds. For the mortgage banks, paragraph 8 of the draft law is clear that the mortgage bank license, as a "general" license, also covers permission to issue covered bonds. The granting of such a general license falls within the ECB’s competence, without entailing any shift of competences between ECB and national competent authorities. However, with respect to the new type of licensing requirements for credit institutions and deposit banks (that is, those other than mortgage banks), the part of the explanatory memorandum that addresses paragraph 9 of the draft law states that "an extension of the authorization of a credit institution to mortgage banking activities, as it currently stands, would be replaced by an authorization procedure for the issue of covered bonds, in which the authorization authority would always be the financial supervisory authority, irrespective of whether the credit institution is directly supervised by the ECB or not." 

    ECB understands that the requirement for Financial Supervisory Authority of Finland (FIN-FSA) to grant an authorization is intended to implement Article 19 of the Directive 2019/2162. It highlights, however, that any power granted to FIN-FSA should be without prejudice to ECB’s exclusive task of authorizing credit institutions and withdrawing authorizations of credit institutions under Article 4(1)(a) of the EU Regulation 1024/2013. ECB would therefore suggest revisiting the explanatory memorandum and the draft legislation based on the above clarification on the delineation of competences between ECB and national competent authorities. It should be clarified that the task of assessing the prudential aspects of an authorization of an entity that wishes to engage in issuance of covered bonds remains with ECB also in relation to credit institutions and deposit banks. Although the abovementioned provisions of the draft law refer to the Financial Supervisory Authority in respect of authorization to issue covered bonds within the meaning of Article 19 of the Directive 2019/2162, it should be clarified that this competence cannot replace the ECB’s prudential assessment. Finally, ECB notes that it is up to the national legislator to decide whether a two-step authorization process regarding the activity of issuing covered bonds is necessary or whether the general authorization to engage in the issuance of covered bonds should be integrated into the general banking license.


    Related Link: Opinion (PDF)

    Keywords: Europe, Banking, Covered Bonds, Mortgage Banks, License, Banking Supervision, SSM, Lending, CRE, Credit Risk, FIN-FSA, ECB

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