On 5 August 2015, an amendment to the Polish Act on Covered Bonds and Mortgage Banks and certain other acts dated 29 August 1997 was signed by the President of the Republic of Poland (the Amendment). The Amendment will enter into force on 1 January  2016.

The legislator’s goal was to propose a series of new solutions with respect to the operation of specialised mortgage banks, in order to guarantee the security of bond acquisition and trading, and thus the development of the Polish capital market. The Amendment was designed to turn Polish covered bonds into high quality instruments, increasing their attractiveness to capital market investors and, in turn, promoting covered bonds as a funding source to the Polish banking sector.

The main changes included in the Amendment are as follows:

  1. Maintenance of a mortgage banks’ statutory overcollateralisation at the level of at least 10% of the value of the issue of covered bonds and a liquidity buffer to secure the servicing of the interest on the covered bonds within the subsequent six-month period;
  2. Limitation of the value of a loan secured with a mortgage, as of the date of its granting or acquisition, to 100% LTV. If the limit is exceeded during the life of the loan, the loan may be monitored by the Financial Supervision Authority;
  3. Increase of the limit of refinancing of residential loans with funds raised from the issue of covered bonds from 60% to 80% of the value of the real property;
  4. Introduction of an obligation on mortgage banks to carry out an asset coverage test and a liquidity test to determine whether their liabilities registered on the security register are sufficient to fully satisfy the holders of the covered bonds and whether they are sufficient to satisfy them by any extended maturity dates;
  5. Enhancement of the security of covered bonds by increasing the protection of creditors – acquirers of the covered bonds through introducing specific rules related to the satisfaction of creditors. Specifically, the Amendment obliges the issuer to provide information about the dates of payment of interest in the event of a mortgage bank making a declaration of bankruptcy, such as information on the systemic solutions providing for the timely servicing of the liabilities after the bankruptcy of the issuer (i.e. by means of liquid funds from a reserve maintained for that purpose by the mortgage bank). In the case of public placements the information should be included in the prospectus whereas for private placements it should be included in the memorandum of information; and
  6. Ability of the court to enter a mortgage in favour of a mortgage bank in the land and mortgage register maintained for a development undertaking upon the application of  the mortgage bank, without the necessity to obtain the developer’s consent.

Although covered bonds were introduced in Poland in 1997, their use was very limited due to unfavourable tax treatment and restrictions on pension funds investing in such securities. Thus, in practice, mortgage banks were not active on the Polish market.

The Amendment, although not yet in force, has already led to the creation of a new mortgage bank, which, according to press releases, plans to issue covered bonds in the near future. This may be a sign of the positive outcome of the reform. The direction of changes included in the Amendment should be judged as positive. However, only market practice will show whether the outcome envisaged by the legislators, to develop the covered bonds market and decrease the cost of residential loans through cheaper financing of banks’ credit activities, will be achieved.