Proposed Amendments to the Finnish Covered Bond Framework│Capital, Funding & Risk Series, Part II

Authors: Hanna Lindberg, Rosa Narvio Read time: 4 min

In Part I of this series, we discussed the FIN-FSA’s thematic review of mortgage credit bank operations and the ongoing legislative reforms. This part takes a closer look, from the perspective of mortgage credit bank operations, at the government proposal relating to the reform of credit institution legislation, which was submitted to Parliament on 15 October 2026.

The proposed acts are intended to enter into force in spring 2027, and the key changes proposed to the Finnish Mortgage Credit Bank Act (151/2022, as amended, the “Act”) are discussed below. The European Banking Authority’s (the “EBA”) latest views on the EU covered bond framework are also briefly covered.

Valuation Frequency of Commercial Real Estate Collateral

The government proposes that the regulation concerning the obligation to monitor the value of real estate collateral for commercial real estate loans (Section 15 of the Act) be amended so that the minimum monitoring frequency would be annual rather than quarterly as under current law. This amendment would be welcome from a lending practice perspective, as valuations of large commercial real estate properties are typically updated annually rather than on a quarterly basis.

Under the proposal, it is noted that keeping a quarterly frequency as the minimum for monitoring residential property values is considered justified by various market participants in view of the transparency of risks associated with covered bonds. In this respect, the Finnish requirements would therefore remain stricter than the EU minimum[1].

Intermediary Loan Operating Model and Foreign EEA Credit Institutions

The government proposes an extension of the intermediary loan operating model to all credit institutions authorised to carry out mortgage credit bank operations. Under the current law, the model is only available where a separate mortgage credit bank issues covered bonds. Moreover, it is proposed that the intermediary loan model be extended to foreign EEA credit institutions within the same group in their capacity as debtors.

This seems to be a positive development considering that Finance Finland (in Finnish: Finanssiala) pointed out back in 2021 that intermediary loan models in relation to foreign EEA credit institutions should be allowed under the national covered bond framework to ensure a level playing field across the EU. However, the following points are worth noting in relation to the draft amendments:

• Collateral arrangements. Assets subject to arrangements complying with the Financial Collateral Directive on the balance sheet of a foreign EEA credit institution acting as an EEA intermediary loan debtor may be included in the cover pool. Such collateral must be recorded in the covered bond register in accordance with Chapter 5 of the Act. The issuer would also have to ensure that such cover assets comply with the requirements set out in the Act regarding the priority rules applicable to them, other legal effects of providing them as collateral, and their treatment in the bankruptcy or liquidation of both the issuer and the EEA intermediary loan debtor (proposed Section 34(4) of the Act).
  
• New notification requirement. EEA intermediary lending would need to be notified to the FIN-FSA unless already covered in the authorisation application referred to in Section 8 of the Act (proposed Section 33a of the Act).

Ranking of Liquidity Facilities

Finally, the government proposes that cover pool assets would also cover liquidity facilities (in Finnish: maksuvalmiusluotto) referred to in Section 44 of the Act and that obligations relating to such liquidity facilities would therefore rank pari passu with other preferred obligations relating to covered bonds. The current ranking of liquidity facility claims was introduced as part of the implementation of the CBD through the Act, which repealed the previous Act on Mortgage Credit Bank Operations (688/2010). To protect the position of other preferred creditors, the proposed amendments also include a restriction on the use of proceeds from the liquidity facilities. Pursuant to the proposed Section 44(3) of the Act, funds obtained under a liquidity facility may be used solely to discharge obligations covered by the cover pool (including costs associated with winding down the cover pool) and to meet the liquidity requirement referred to in Section 31 of the Act.

What the EBA Still Wants to See at EU Level

The EBA’s latest advice on the EU covered bond framework points to potential further changes at EU level. The topics addressed by the EBA include, among other things, differences in how real estate collateral is valued across Member States. Finland, like Denmark, Sweden, and France, were reported to apply market value, whereas Germany, Hungary, Spain, and Poland apply the more conservative mortgage lending value methodology. Belgium, by contrast, was reported to apply prudent valuation. The EBA calls for further assessment of the costs and benefits of aligning valuation rules with the prudent valuation approach under the credit risk framework.

Another topic addressed by the EBA is cover pool derivatives, for which the EBA recommends stronger safeguards through high-quality collateral, full segregation of derivative contracts, and, where the counterparty is internal or within the issuer’s prudential consolidation group, a replacement counterparty ready to step in upon default or downgrade.

[1] I.e., Article 129(3) of the Capital Requirements Regulation (EU) No 575/2013 (the “CRR”), as applied under the Covered Bond Directive (EU) 2019/2162 (the “CBD”)

If you have any questions or would like to discuss these topics in more detail, please contact our Financial Services Regulation Team.