On the 3rd February 2017 the Czech Ministry of Finance submitted the amendment of the Act on Bonds, No 190/2004 Coll. as amended, which includes the amendment of other related laws, especially the Act on Insolvency, the Act on recovery measures and resolution of crisis on the financial market and the Act on Capital Market Undertakings.
According to the Ministry of Finance it has become apparent that the existing legislation is obsolete. It lacks many provisions which may be found in other European legislations. As a result, there is a relatively negative legislation assessment for Czech mortgage bonds by rating agencies and it also reduces their attractiveness. Therefore, the submitted amendment is based mainly on the German law Pfandbriefgesetz (Law on Mortgage Bonds) from 2005. Moreover, other sources were taken into account such as the legislation in Belgium, Poland or Romania.
The amendment completely replaces the existing legislation of mortgage bonds by the so-called covered bonds which is a wider concept than mortgage bonds. The cover assets are not necessarily only mortgage credits but also e.g. debts of public entities. The current mortgage bonds may be understood as a subcategory of covered bonds.
The objective of the legal amendment is to ensure that the interests of investors in mortgage bonds or covered bonds, respectively, are protected no matter which difficulties the issuer is facing. Typically, this may be a bankruptcy, but newly also other measures to prevent bankruptcy of a bank according to the Act on recovery measures and resolution of crisis on the financial market must be considered.
In prudential regulation the covered bonds may receive preferential risk weights according to the Article 129 Regulation No 575/2013 (CRR), if they meet the conditions laid down therein. Thus they become attractive assets. The risk weight of the highest quality covered bonds may be only 10 %. However, not all covered bond comply with the CRR.
Let us remind a brief characteristic of covered bonds as presented by the European Commission in its report for European Parliament and Council as of 20th October 2015: “Covered bonds are debt obligations issued by credit institutions and secured on the back of a ring-fenced pool of assets (the "cover pool" or "cover assets") which bondholders have direct recourse to as preferred creditors. Bondholders remain at the same time entitled to a claim against the issuing entity or an affiliated entity of the issuer as ordinary creditors for any residual amounts not fully settled with the liquidation of the cover assets. This double claim against the cover pool and the issuer is denominated the "dual recourse" mechanism. Furthermore, the cover pool comprises high quality assets, typically, but not exclusively, mortgage loans and public sector debt. The issuer is normally under the obligation to ensure that the value of the assets in the cover pool at least matches at all times the value of the covered bonds and to replace assets that become non-performing or, otherwise, do not meet relevant eligibility criteria.“
10-3-2017