Assets as mentioned in the Financial Institutions Act section 2-28 first paragraph a) and b) may not have a loan-to-value ratio higher than the following upon inclusion in the cover pool:
- 75 per cent of prudent market value in the case of residential mortgages.
- 60 per cent of prudent market value in the case of commercial mortgages.
Assets in the form of public sector loans as mentioned in the Financial Institutions Act section 2-28 first paragraph d) must be granted to or guaranteed by central authorities (states), central banks, regional and local authorities and state-owned enterprises within the EEA or OECD area. Public sector loans to counterparties within the OECD area, but outside the EEA, shall be granted to or guaranteed by counterparties as mentioned in the first sentence, multilateral development banks or international organisations which qualify for credit quality step 1 or better. Similarly, assets which qualify for credit quality step 2 may constitute at most 20 per cent of the nominal value of outstanding covered bonds. The Capital Requirements Regulations sections 5-1 to 5-5 concerning risk weighting of on-balance sheet items apply insofar as appropriate.
The requirement as to risk classification of public sector bodies mentioned in the second paragraph similarly applies where the latter are party to derivative contracts or to contracts involving assets used as substitute assets as mentioned in the Financial Institutions Act section 2-28 first paragraph e) and f). Claims (exposures) on institutions etc as mentioned in the Capital Requirements Regulations section 5-6 which qualify for credit quality step 1, shall in aggregate not exceed 15 per cent of the nominal value of outstanding covered bonds. Amounts due to operation and management of the cover pool, including settlement of loans, and transfers of payments to preferential creditors shall not be included for the purpose of the 15 per cent limit. The same applies to covered bonds issued by other institutions, cf. fourth paragraph. Claims on institutions within the EEA with a maturity of up to 100 days shall qualify for credit quality step 2 or better.
Substitute assets in the form of securities issued by credit institutions with a preferential claim over a cover pool under the Financial Institutions Act chapter 2 subchapter IV, or equivalent statute in another EEA country, and securities issued under the Financial Institutions Act chapter 2 subchapter V with a basis in securitised residential mortgages or commercial mortgages, or equivalent statute in another EEA country, which qualify for credit quality step 1, may in aggregate constitute no more than 20 per cent of the nominal value of outstanding covered bonds.
Within the constraints of the Financial Institutions Act section 2-28, the cover pool may otherwise contain such assets as are established by the authorities in the state concerned in accordance with the requirements of Directive 2006/48/EC, Annex VI, part 1, no. 12 points 68-71.
Assets which do not conform to the above-mentioned risk classification, quantitative limits, loan to value ratios or other requirements under this section, may nonetheless be included in the cover pool, but shall not be included for the purpose of verifying the institution’s compliance with asset coverage requirement under the Financial Institutions Act section 2-31. Assets which exceed the above-mentioned quantitative requirements or loan to value ratios, may be included in respect of that portion which meets the requirements. The value of residential mortgages and commercial mortgages may be included up to the limits stated in the first paragraph even if a subsequent value change indicates that the limits have been exceeded, cf section 10 second paragraph.
Interest rate and foreign exchange contracts and substitute assets shall be assigned to the cover pool and the associated bond issue to which the contracts and the substitute assets relate. Where a mortgage credit institution has issued two or more bonds not conferring a preferential claim over the same cover pool, interest rate and foreign exchange contracts and substitute assets shall be held in separate bank or CSD accounts for each cover pool.
Interest income on the cover pool shall at all times exceed the sum of the costs of the bond issue. In calculating the costs, account shall also be taken of the cash flows accruing from interest rate and foreign exchange contracts entered into.
Loans which a mortgage credit institution has recorded as non-performing shall not be taken into account in calculating the cover pool under the Financial Institutions Act section 2-31.