Ministry working on bill to introduce covered bonds
Covered bonds are considered safer than other similar types of investment, and could help keep the money e.g. invested by pension funds in the country. They could also bring new foreign investment to Estonia, the Ministry of Finance thinks.
The Ministry of Finance took up preliminary work on the bill already a year ago, and is currently working on the proposed legal text as well as explanations to be submitted with it. As the ministry confirmed to ERR late last week, they are hoping to start the evaluation process this year, in the course of which the different parties affected will get a chance to comment and propose changes.
Head of the ministry’s financial markets policy department, Siiri Tõniste, told ERR that they would be busy mainly with Estonia’s presidency of the Council of the European Union in the second half of 2017, but that at the same time the European Commission was planning to present its own approach to an EU regulation of covered bonds.
Covered bonds are basically corporate bonds, with the difference that the issuing corporation, typically a bank, uses its own pool of real estate collateral to back them up. Because in the case of a default on the bond, the investor has a claim both to the bank’s funds as well as its real estate collateral, covered bonds are considered safer than other financial instruments of a comparable nature. Also, in the case of a bank going out of business, the real estate collateral pool is separated from the rest of its assets, which means that investors in covered bonds also have a better chance to get their money back in a potential liquidation process.
There is no general European regulation of covered bonds, and in most countries that allow banks to issue them they are regulated separately from other financial instruments. So far, Estonia has not granted any kind of business the right to issue covered bonds.
According to Tõniste, they could prove popular, as they are a good investment instruments e.g. for pension funds. “In such a case the money pension funds can invest would be more likely to remain in Estonia. On the other hand, they would also allow foreign investors to bring more money to the Estonian capital market,” she explained.
Covered bonds were first introduced in Germany in the 18th century, where they remain an important financial instrument today. Total covered bonds issued in Germany were worth more than €525 billion in 2015.
Editor: Editor: Dario Cavegn