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Flash Info Banking & Finance | The Belgian covered bonds: an opportunity not only for the credit institutions, but also for the investors


Like most of European countries, Belgium adopted on 3rd August 2012 a specific regime for covered bonds, granting Belgian credit institutions access to a new source of financing with less expensive financial conditions.

The law of 3 August 2012 establishing this legal regime for Belgian covered bonds (the “Law”) is the result of long discussions between the banking sector and the Belgian supervisory authorities (National Bank of Belgium (NBB) and FSMA), initiated in 2009 following the financial crisis.

The implementation of the Law, expected by the sector, is now made possible following the adoption of the Royal Decree dated 11 October 2012.

This note below describes the key elements of this new regulation.

The Belgian covered bonds: notion

A Belgian covered bond is a security issued by a Belgian credit institution for which a special estate has been set up within this credit institution to guarantee its reimbursement. Indeed, the credit institutions issuing covered bonds will now have, in accordance with the Law, a general estate and one or several separated estates (one per bond issue or bond programme issue). These separated estates are exclusively dedicated to the guarantee of the covered bonds. They constitute an exception to the general rule according to which a company is held liable over all its assets.

These special estates are assets which provide, during the life of the covered bonds, sufficient coverage in order to ensure the reimbursement of the principal and the payment the interests of the covered bonds (as well as the managing and administration costs of these cover pools). The Law also provides for a periodic valuation and over-collateralisation of these assets. In case of excessive depreciation, the credit institution has to adjust each cover pool in order to maintain an adequate level of coverage. In order to make the Belgian covered bonds attractive to investors, and reduce the cost of the financing of the credit institution, it was necessary to ensure that the cover pool was of good quality.

These assets shall be residential or commercial mortgaged loans receivables or receivables owed by public authorities or credit institutions.

The management of these assets normally lies with the credit institution, except in certain cases of failure (potential or actual), in which case a third party manager may be imposed by the NBB.

Each portfolio of eligible assets is subject to the supervision of an auditor in charge of monitoring the portfolio and making periodic reports to the NBB.

The Belgian “lettre de gage/pandbrief

The legislator has established a distinction between two types of covered bonds, depending on whether the composition and the valuation of the cover pool comply or not with the capital requirements provided by the Belgian banking regulation (relating in particular to assets weighting and valuation rules, as specified in the Royal Decree).

Covered bonds which comply with this regulation are named Belgian "lettres de gage/pandbrieven". According to the Royal Decree, Belgian credit institutions may only issue “lettres de gage/pandbrieven” (at least to begin with).

Conditions for issuing Belgian covered bonds

Belgian credit institutions who wish to issue covered bonds must obtain prior approval from the NBB. Following the application filed by the requesting Belgian credit institution, the NBB will rule on the organisational ability of the credit institution to issue covered bonds. This approval will be granted only if the NBB considers that the applying institution has the administrative and accounting organisation to comply with the Law and, in particular, to carry out the segregation of the cover pools, and that its financial situation, in particular its solvency, can safeguard the interests of the creditors, other than the holders of the covered bonds.

Then, for each new issue or issuing programme of Belgian covered bonds, the credit institution will need to apply for a new authorisation from the NBB by introducing a new application file. The list of credit institutions authorised to issue Belgian covered bonds and the list of issued bonds and programmes are published on the NBB’s website.

Segregation of the special estate

Unlike other European countries that have favored the issuance of covered bonds throughout special purpose vehicles (SPVs), the Belgian legislator has opted for a solution “on balance sheet”. However, since the aim of covered bonds is to dedicate a pool of assets to secure the holders of covered bonds, it was therefore necessary to segregate the cover pool from the other assets of the credit institution. The Law has thus created an artificial separation between the general estate of the institution (which remains the general pledge of the other creditors of the institution) and the special estates (which have no legal personality). This segregation will be formalised by registering the cover pool of assets composed of a special estate in an ad hoc register.

This registration also prevents the exercise of any right, including seizure, set-off or the right not to perform a contract obligation due to non-performance by the other party, by any other creditor of the institution (including savers). This provision is already subject to debate as to its constitutionality (potential breach of the general rule of equal treatment).

Finally, the Law provides for a series of mechanisms protecting the special estates in case of insolvency of the credit institution. In such a case, the cover pool will be automatically excluded from the insolvency estate in order to be exclusively dedicated to the relevant special estate, and the given winding-up proceeding will be limited to the general estate. Moreover, the winding-up proceeding will not trigger the early reimbursement of the debts and liabilities covered by a special estate. It should also be noted that the covered bonds holders will not only have a right of recourse on the cover pool as such, but also on the general estate of the credit institution (“dual recourse”).


The Law will offer Belgian credit institutions a new source of financing on favourable financial terms, by mobilising some of their high-quality receivables. At a time when the cost of financing is crucial, this legislative initiative should be welcomed, especially as this will place the Belgian credit institutions on a level playing field identical to that of their European competitors.


Picture of Grégory Benteux
Grégory Benteux