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The Draft Law on Spanish Covered Bonds Has More Positive Than Negative Features

On 25 June, the Spanish Ministry of Economic Affairs published a draft of the law (the Draft Law) that will transpose the European Commission’s Covered Bond Directive (the Directive), which outlines the harmonisation of covered bond (CB) frameworks across Europe. The Draft Law is aligned with the Directive in most sections, and includes several positive features for Spanish covered bonds. However, high Spanish OC level, which is one of the main CB strengths, may decrease in the future because no minimum overcollateralisation (OC) level is required.

Some of the positive features are:
• The more restrictive LTVs and the frequent update of the property valuations.
• The six-month liquidity buffer required in the cover pool.
• In case of insolvency or resolution, a special cover pool administrator is assigned to protect the interests of the covered bondholders. Furthermore, if the assets in the cover pool are not sufficient to meet payments, some more assets may be added to the cover pool to meet the asset coverage requirement.

The main negative feature is that no minimum OC level is required. This compares to the high OC level that Spanish covered bond programmes are currently required to maintain.