Opinion of the European Central Bank of 22 February 2022 on covered bonds (CON/2022/6)

OPINION OF THE EUROPEAN CENTRAL BANK of 22 February 2022 on covered bonds (CON/2022/6) Introduction and legal basis

On 24 January 2022 the European Central Bank (ECB) received a request from the Bulgarian Minister of Finance for an opinion on a draft law on covered bonds (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third and sixth indents of Article 2(1) of Council Decision 98/415/EC , as the draft law relates to Българска народна банка (Bulgarian National Bank, BNB) and to rules applicable to the financial institutions insofar as they materially influence the stability of financial institutions and markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1 The main purpose of the draft law is to implement Directive (EU) No 2019/2162 of the European Parliament and of the Council in Bulgarian law. Under the draft law only authorised credit institutions may issue covered bonds. The draft law accordingly designates BNB as the competent authority responsible for the public supervision of covered bonds issued by credit institutions and confers on it supervisory, investigatory and sanctioning powers in relation to the compliance with the requirements of the draft law of credit institutions issuing covered bonds, including under covered bond programmes. More particularly, BNB is to authorise the issuance by credit institutions of a covered bonds programme and to concur with the appointment of the monitoring body for the cover pool. BNB may impose various supervisory measures on issuer credit institutions. BNB may appoint a special administrator for the covered bond in the event the respective conditions of the draft law are met. BNB is also required to make certain disclosures, including the publication on its website of the list of credit institutions permitted to issue covered bonds. The draft law supplements Article 16 of the Law on BNB to reflect the new powers of BNB. 1.2 In addition, the draft law repeals the Law on mortgage bonds .

1.3 Finally, the draft law amends a number of other laws. Most notably, the draft law amends the Law on credit institutions to provide that the Directorate for the Protection of the Financial Interests of the European Union of the Ministry of the Interior may have access to the central credit register and the bank account register operated by BNB.

2. General observations

The ECB welcomes the draft law’s introduction of a new legal regime for covered bonds, which aims to contribute to the development of the Bulgarian capital market and improve the level of protection and legal certainty for investors .

3. Conferral of new tasks on BNB regarding the supervision of covered bonds

3.1 New tasks of BNB 3.1.1 The draft law confers tasks concerning the supervision of covered bonds on BNB. There is no existing national legislation on covered bonds in Bulgaria and BNB does not have any relevant supervisory tasks under the existing Law on mortgage bonds which is repealed by the draft law. Therefore, the draft law confers new tasks on BNB. 3.1.2 The ECB emphasises that a proposed conferral of new tasks on a national central bank (NCB) participating in the European System of Central Banks (ESCB) must be assessed against the prohibition on monetary financing under Article 123(1) of the Treaty. For the purposes of that prohibition, Article 1(1)(b)(ii) of Council Regulation (EC) No 3603/93 defines ‘other type of credit facility’ as, inter alia, ‘any financing of the public sector’s obligations vis-à-vis third parties’. 3.1.3 Ensuring that Member States implement a sound budgetary policy is one of the key objectives of the prohibition on monetary financing. Therefore, the task of financing measures, which are normally the responsibility of the Member States, and which are financed from their budgetary sources rather than by the NCBs, must not be entrusted to NCBs. To decide what constitutes financing of the public sector’s obligations vis-à-vis third parties, which can be translated as the provision of central bank financing outside the scope of central bank tasks, it is necessary to carry out, on a case-by-case basis, an assessment of whether the task to be undertaken by an NCB is a central bank task or a government task, i.e. a task within the responsibility of the Member States. 3.1.4 As part of its discretion in the exercise of its duty, on the basis of Article 271(d) of the Treaty and Article 35.6 of the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘Statute of the ESCB’), to ensure that NCBs honour the obligations laid down by the Treaty, the Governing Council has endorsed safeguards in the form of criteria for determining what may be considered as falling within the scope of ‘the public sector’s obligations vis-à-vis third parties’ within the meaning of Article 1(1)(b)(ii) of Regulation (EC) No 3603/93 or, in other words,

what constitutes a government task, as follows: First, central bank tasks are, in particular, those tasks that are related to the tasks that have been conferred upon the ECB and the NCBs by the Treaty and the Statute of the ESCB. These tasks are mainly defined in Article 127(2), (5) and (6), and Article 128(1) of the Treaty, as well as in Article 22 and Article 25.1 of the Statute of the ESCB. Second, as Article 14.4 of the Statute of the ESCB allows NCBs to perform ‘functions other than those specified in [the Statute of the ESCB]’, new tasks, i.e. tasks that are not related to tasks that have been conferred upon the ECB and the NCBs, are not precluded per se. However, new tasks that are undertaken by an NCB and which are atypical of NCB tasks or which are clearly discharged on behalf of, and in the exclusive interest of the government or of other public sector entities, should be considered government tasks. Third, an important criterion for qualifying a new task as atypical of an NCB task, or as being clearly discharged on behalf of and in the exclusive interest of the government or other public sector entities, is the impact of the task on the institutional, financial and personal independence of that NCB. In particular, the following aspects should be taken into account: (a) whether the performance of the new task creates conflicts of interest with existing central bank tasks which are not adequately addressed, and its performance does not necessarily complement those existing central bank tasks. If a conflict of interest arises between existing and new tasks, sufficient safeguards to mitigate that conflict should be in place. The complementarity between a new task and existing central bank tasks should not be interpreted broadly so that it could lead to the creation of an indefinite chain of ancillary tasks. Such complementarity should be examined in relation to the financing of those tasks; (b) whether without new financial resources the performance of the new task is disproportionate to the NCB’s financial or organisational capacity, and may have a negative impact on the capacity to properly perform the existing central bank tasks; (c) whether the performance of the new task fits into the institutional set-up of the NCB in the light of central bank independence and accountability considerations; (d) whether the performance of the new task harbours substantial financial risks; (e) whether the performance of the new task exposes the members of the NCB decision-making bodies to political risks that are disproportionate and may also have an impact on their personal independence and, in particular, on the guarantee of term of office set out in Article 14.2 of the Statute of the ESCB. 3.1.5 The systematic categorisation of tasks assigned to NCBs as central banking or government tasks applies to genuinely new tasks that did not exist in the past or did not form an integral part of the central banking tasks already assigned to the NCB in the past. In recognition of the different Member States’ legal frameworks, central banking traditions and national set-ups, the tasks currently discharged by an NCB as central banking tasks are not reviewed and re-categorised, but may be reassessed if they are subject to legislative amendments of substance . On the basis of the criteria

set out in paragraph 3.1.4, the following paragraphs assess whether the draft law is in line with the

prohibition on monetary financing.

3.2 Tasks related to the tasks conferred upon the ECB and the NCBs by the Treaty and the Statute of

the ESCB

BNB’s proposed new task of supervising covered bonds is not related to the tasks conferred upon

the ECB and the NCBs by the Treaty and the Statute of the ESCB.

3.3 Tasks which are atypical of central bank tasks

The task of supervising covered bonds is not atypical of central bank tasks. This task complements

the existing role of several NCBs as supervisors of credit institutions. A central bank acting as a

banking supervisor may be entrusted with the task of supervising covered bonds due to its specific

expertise regarding credit institutions’ balance sheets, which is relevant to ensuring compliance with

the requirements relating to the high quality of covered assets with the purpose of ensuring the

robustness of the covered pool.

In the implementation of Directive (EU) 2019/2162, or under other relevant provisions of national law,

Member States have conferred supervisory tasks in relation to covered bonds on a wide range of

public authorities including central banks, financial supervisory authorities (some of which are central

banks), and securities market supervisors. More concretely, the ECB has identified ten Member

States that have directly conferred these supervisory tasks or a substantial part of these supervisory

tasks on their NCBs . The ECB also understands that in the implementation of Directive (EU)

2019/2162 several Member States are considering conferring tasks relating to the supervision of covered bonds on their respective NCBs. BNB is the body responsible for the supervision of credit institutions on the basis of Article 1(2) of the Law on credit institutions, which in accordance with the draft law are the only entities that may issue covered bonds in Bulgaria. Given BNB’s existing role in the supervision of credit institutions, a role which numerous other ESCB NCBs fulfil in relation to such institutions in their respective Member States, its new tasks under the draft law are not atypical of central bank tasks. 3.4 Tasks clearly discharged on behalf of and in the exclusive interest of the government For the same reasons, BNB’s new supervisory tasks in relation to covered bonds issued by credit institutions are not tasks discharged on behalf of and in the exclusive interest of the government. BNB already plays a role in the prudential supervision of credit institutions. There is no indication that, in carrying out the new tasks conferred by the draft law, BNB would be acting exclusively in the interest of another public authority. 3.5 Extent to which performance of the new tasks creates conflicts of interest with existing central bank

tasks

Since BNB’s new tasks under the draft law complement its existing tasks, no conflicts of interest arise with other aspects of BNB’s mandate. 3.6 Extent to which the performance of the new tasks is disproportionate to BNB’s financial or

organisational capacity

BNB must have sufficient resources, including personnel, for the performance of assessments and the issuance of directions under the draft law, so that its capacity to perform its ESCB-related tasks is not affected. In this regard, the draft law does not specifically address how the additional expenses that arise from granting BNB these additional powers will be financed. The ECB understands that the additional resources required by BNB to exercise these additional powers will be financed through its existing budgetary framework and so there will be no specific cost recovery mechanism designed to ensure the full recovery of the costs incurred in carrying out the supervision of covered bonds. However, the performance of the new tasks by BNB is not disproportionate to its financial or organisational capacity. 3.7 Extent to which performance of the new tasks fits into BNB’s institutional set-up, in the light of central

bank independence and accountability considerations

The performance of the new tasks appears to be aligned with BNB’s institutional set-up and, as mentioned in paragraph 3.3, its role as the prudential supervisor of credit institutions.

3.8 Extent to which the performance of the new tasks harbours substantial financial risks The performance of the new tasks does not harbour substantial financial risks for BNB. The draft law provides that BNB and its authorised officials are not liable for damage in the exercise of their covered bond public supervision functions, unless they acted intentionally or with gross negligence. 3.9 Extent to which the performance of the new tasks exposes members of BNB’s decision-making bodies to disproportionate political risks and has an impact on their personal independence The performance of the new tasks conferred by the draft law does not expose members of BNB’s decision-making bodies to any disproportionate political risk or have an impact on their personal independence. 3.10 Conclusion The new tasks conferred by the draft law on BNB regarding the supervision of the issuance of covered bonds by credit institutions can be regarded as central bank tasks, as they would complement BNB’s existing functions in relation to the prudential supervision of credit institutions. The new tasks conferred by the draft law are not atypical of central bank tasks and have been conferred on a number of other ESCB NCBs.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 22 February 2022.

[signed]

The President of the ECB

Christine LAGARDE