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New “cooperative” covered bonds introduced under the amended covered bond framework

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Paul Peporte
Paul Péporté



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01 October 2013

The Luxembourg legislation on covered bonds1 has been recently amended.2

One of the novelties introduced by this legislative change (in addition to the creation of a new insolvency regime for Luxembourg covered bond banks) is the introduction of a new type of covered bond that may be issued by Luxembourg covered bond banks, namely, “cooperative” covered bond or “lettres de gage mutuelles” (in German: “Verbundpfandbriefe”).

By introducing this new type of covered bond, the Luxembourg legislator extends the scope of Luxembourg covered bonds to an asset class that appears less common in the international covered bonds arena. This change may open the doors to new structuring opportunities in the future.

According to the new law, cooperative covered bonds may be issued by a Luxembourg covered bond bank in respect of lending to “cooperative banks”, that is, credit institutions established in an EU Member State, an EEA Member State or an OECD state, which are members of an institutional protection scheme (an IPS). The Banking Act 1993 lays down a list of criteria which must be met by an IPS to be “eligible”: these include, for instance, that the statutory purpose of the IPS must be to avert imminent or existing economic difficulties of the IPS member institutions.

Exposure to such “cooperative banks” may be obtained by a Luxembourg covered bond bank in a number of different ways. Next to traditional lending to eligible cooperative banks, a Luxembourg covered bond bank may also, in consideration for the issuance of cooperative covered bonds, grant loans which are guaranteed by debt securities issued by eligible cooperative banks or commitments (in any form) of such eligible cooperative banks. The loans granted by the Luxembourg covered bond bank may be structured in any form, including via an acquisition of bonds or other forms of debt securities that meet the requirements of the Banking Act 1993 (this includes, subject to certain restrictions (especially as to minimum credit ratings), securitised debt securities which have exposure to eligible cooperative banks).


1 Set out in the Luxembourg act dated 5 April 1993 concerning the financial sector, as amended (the Banking Act 1993). 
2 The Luxembourg act dated 27 June 2013 on Luxembourg covered bond banks.