Like most European countries, Belgium has adopted since 3 August 2012 a specific regime of covered bonds, allowing credit institutions to have a new source of financing with financially more favourable terms. The law of 3 August 2012 establishing a legal regime for the 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 briefly 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 and whose repayment is guaranteed by a special estate set up within the credit institution. Indeed, the credit institutions issuing the covered bonds will now have, on the basis of the Law, a general estate and one or several special estates (one per bond issue or bond programme issue), the latter, in contrast to the general estate, being partitioned and exclusively reserved for the guarantee of those covered bonds. These special estates constitute an exception to the principle pursuant to which a company is held liable for its liabilities over all its assets.

Those special estates consist of assets which need to provide, during the life of the covered bonds, sufficient coverage in order to afford repayment of the principal and the interests of the covered bonds (as well as the managing and administration costs of this cover pool). These assets must also provide a surplus in case of depreciation of those assets, which are subject to a periodic valuation. In case of excessive depreciation, the credit institution has to adjust its cover pool portfolio in order to maintain an adequate level of coverage.

In order to make the Belgian covered bonds attractive for investors, and reduce the cost of the financing of the credit institution, it was necessary to ensure the best quality of this cover pool. Those will mandatorily need to be residential or commercial mortgage receivables or receivables on the public authorities or other 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. That said, since its inception, the portfolio is subject to the supervision of a cover pool monitor, i.e. an auditor in charge of supervising 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 Belgian regulation regarding capital requirements. Covered bonds whose compliance is ensured (because they meet the criteria of weighting, the evaluation rules, etc as specified in the Royal Decree) are named “Belgian lettres de gage/pandbrieven”.

According to the Royal Decree, Belgian credit institutions may only (at least to begin with) issue “lettres de gage/pandbrieven”, and will notbe able to issue covered bonds which would deviate from Belgian regulation regarding capital requirements.

Conditions for issuing Belgian covered bonds

The Belgian credit institutions that wish to issue covered bonds must obtain prior approval from the NBB. Upon delivery of a file, the NBB will rule on the organizational capacity of the credit institution to issue covered bonds. This approval will be given only if the NBB is satisfied that the issuing institution has the administrative and accounting organization to ensure compliance with the Law and, in particular, to carry out the segregation of this cover pool, 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 program of Belgian covered bonds, the credit institution must apply for new approval of the NBB by introducing a new file on the given issue or issuance programme.

The list of credit institutions authorized to issue Belgian covered bonds and the list of issued authorized bonds and programmes will be 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”: the cover pool remains on the balance sheet of the credit institution. However, since the very principle of covered bonds is that these assets are used solely to guarantee the holders of covered bonds, it was therefore necessary to ensure a separation of the cover pool from the rest of the 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 formalized by registering the cover pool of assets composing 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 principle 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 repayment of the debts and liabilities covered by a special estate. It should also be noted that the holders of Belgian covered bonds 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 terms, by mobilizing 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 oftheir European competitors.