By Mathias Pleissner, Covered Bonds

The recommended halving of Polish banks’ Long-Term Funding Ratio, unveiled on 26 November, came alongside ambitious plans from the Polish Financial Supervision Authority (KNF), which could bring Polish covered bonds back from obscurity.

Planned measures include the creation of an interbank trading platform for covered bonds; the eligibility of covered bonds for repo operations with the National Bank of Poland; the development of a Polish covered bond benchmark; the establishment of a separate category for covered bond debt funds; and enabling the Bank Guarantee Fund to support covered bond structures.

These initiatives aim to transform the Polish covered bond market from a niche segment into a more robust and integrated part of the financial system. An interbank trading platform and a domestic benchmark could improve liquidity and secondary market depth, making covered bonds easier to trade and more attractive to institutional investors. Allowing covered bonds to be used in repo operations with the National Bank of Poland could increase demand among banks and investors, particularly in domestic currency.

Introducing a dedicated category for covered bond debt funds, meanwhile, would broaden the investor base by attracting specialised investment vehicles, while support from the Bank Guarantee Fund would reinforce the perception of covered bonds as a safe and reliable instrument. Together, these initiatives could provide the structural backbone needed to foster issuance in Polish zloty and align the market with European standards, ultimately boosting its competitiveness and credibility both nationally and internationally.

While these initiatives seem well-targeted to support the development of Poland’s covered bond market, the recommended changes to the WFD could have the opposite effect, albeit with only minimal impact. When the ratio was first introduced, we expected it to boost the Polish covered bond market, not only because covered bonds help stabilise the ratio but also because retail deposits with contractual maturities of at least two years and residual maturities of at least one year were scheduled to be phased out from the ratio by the end of 2027, making covered bonds their natural substitute.

The recommended changes weaken these requirements, however. The minimum long-term funding ratio is now proposed to be reduced from 40% to 20%. Also, deposits will not be fully phased out. They can still contribute to the ratio, albeit only up to a 5% cap and at 50% of their value.

We do not believe the cut in the WFD and inclusion of capped retail deposits will harm the market, but it will not be a game changer for Polish covered bonds either. The Polish covered bond market remains under-developed and requires stronger support to bring it to life. The KSA action plan is a great example.

Poland has one of the smallest covered bond markets in Europe. With just EUR 4.2bn outstanding in 2024, the market is insignificant relative to market leaders such as France, Denmark, and Germany, each of which has more than EUR 300bn in covered bonds outstanding.

Sustainable issuance is even more limited: only EUR 117m of Poland’s covered bonds qualify as green or sustainable, rendering the country a laggard in ESG issuance. This contrasts sharply with the WFD’s preferential treatment for green instruments, which benefit from a 1.2 multiplier.

See also: Polish covered bond issuance expected to surge in next two years.