Covered Bonds In Liechtenstein

Liechtenstein has reached a historic milestone in financial regulation: for the first time, the jurisdiction has established a dedicated covered bond regime. By introducing both the EuGSVG and the Pfandbriefgesetz, Liechtenstein has not only implemented the European covered bond framework, but has also created a distinct national model tailored to the needs of its own financial centre.

This article examines that landmark development and analyses how the new legal architecture opens the door to a well-established funding instrument while marking a new chapter in Liechtenstein banking and capital markets law.

Introduction

Covered Bonds: The “Pfandbrief”

A Pfandbrief is generally understood to be a secured debt security issued by a credit institution (“bank”). Owing to its special statutory framework, it is intended to guarantee a particularly high level of protection for investors; historically, Pfandbriefe were even regarded as a form of especially safe trustee investment (Art 1(2) EuGSVG; Liechtenstein BuA 104/2022¹.

Pfandbriefe are specific funding instruments for banks. Their value for creditors is supported in particular by the principle of dual recourse, quantitatively and qualitatively safeguarded so as to reduce investors' credit and residual risk, and by over-collateralisation requirements. Coupled with the potential tradability of the security in deep markets, this can result in low funding costs and thus higher interest margins for the issuer. The statutory regime specifically applicable to Pfandbriefe and covered bonds, together with the associated internal and external supervision, distinguishes the product from ordinary secured funding and is designed to bolster confidence in the instrument (Stern, 2020; Stern, 2022; Directive (EU) 2019/2162).

From the perspective of European financial-market regulation, transactions involving European covered bonds are privileged in several respects: for example, by lower risk weights under the standardised approach to credit risk and by recognition as stable funding for liquidity purposes such as the LCR and the NSFR. Pfandbriefe are also generally recognised for central-bank transactions and, in part, as high-quality liquid assets under the LCR, allowing investing banks to generate short-term liquidity. In addition, investors in secured financing instruments need not fear write-down, conversion or bail-in in times of crisis. That said, this may come at the expense of other creditors of the bank, which is why supervisory authorities monitor asset encumbrance more closely (BCBS, 2013; SRB, 2021; Art 56(2)(b) LI-SAG².

Although minimum harmonisation has now taken place across the EEA, both the legal frameworks and the covered-bond markets continue to differ substantially from one jurisdiction to another. These differences regularly concern such matters as the supervision and eligibility of cover assets, the structure of the cover pool and the role of trustees, maturity and currency transformation, and the question whether issuers require a separate licence or concession. Since early 2026, the Liechtenstein financial centre established an authorised “Pfandbrief institution”.

The Pfandbrief Market

From 2014 onwards, the monetary-policy stance of the European Central Bank, still shaped by the aftermath of the 2008–09 financial crisis, determined the spread between Pfandbriefe and sovereign bonds in euro markets. At first the ECB admitted only Pfandbriefe and asset-backed securities to the select group of securities eligible for purchases. This significantly compressed the spread between covered bonds and public-sector debt, until the ECB announced that quantitative easing would be extended to sovereign bonds as well. Once euro rates turned sharply negative in 2019, Pfandbriefe found it difficult to keep pace with government bonds trading at deeply negative yields, and spreads widened again. During the COVID-19 crisis monetary policy became still more expansionary, and the newly introduced PEPP focused primarily on public-sector purchases, while Pfandbrief issuance declined as deposits rose and long-term central-bank liquidity remained abundant. It was only after the end of quantitative easing that issuance volumes in the Pfandbrief market increased markedly (ECBC, 2025).

According to a recent study by Zürcher Kantonalbank, Swiss Pfandbriefe account for more than one third of the domestic Swiss-franc bond market and therefore represent the largest category by volume in that segment. They are the most important capital-market funding source for Swiss banks. Market appetite nevertheless depends, unsurprisingly, on interest-rate conditions and growth in mortgage markets. Thus, the Swiss National Bank’s rate increases from mid-2022 noticeably slowed mortgage growth, which accelerated again after policy-rate cuts. It should be noted, however, that the issuance of Swiss Pfandbriefe is legally confined to the Pfandbriefzentrale der schweizerischen Kantonalbanken and the Pfandbriefbank schweizerischer Hypothekarinstitute. For Liechtenstein, no market data exist as of Q1 2026 because there have not yet been any issuances (SNB, 2026; see also VPB, 1981).

Pfandbriefe in Liechtenstein

To date, the raising of funds by Liechtenstein banks through secured funding instruments has played only a minor role. This is due less to the private-banking business model as such — secured issuance is in principle open to all banks regardless of their business model — than to the domestic sector’s comparatively low capital-markets orientation and the limited need to obtain additional liquidity.

For the Liechtenstein financial centre, embedding the Pfandbrief product in national financial-market law was, despite the long traditions of neighbouring jurisdictions in the DACH region, not a realistic option until very recently. It was only the initiatives taken at European level that ultimately led to Liechtenstein’s first Pfandbrief legislation.

Contrary to the European trend toward consolidation of national covered-bond legislation — Austria, for example, merged three pre-existing regimes into a single Pfandbrief Act — the Liechtenstein legislature has now introduced two separate statutes, albeit with different purposes and structures.

First, Liechtenstein implemented Directive (EU) 2019/2162 by enacting the Act of 2 March 2023 on European Covered Bonds (EuGSVG). Subject to a specific supervisory licence, every bank may issue covered bonds under the fully harmonised label “European Covered Bond”, with or without the “Premium” designation. The EuGSVG is closely modelled on Austrian law. Directive (EU) 2019/2162 was incorporated into the EEA Agreement on 12 July 2022 without substantive changes (Directive (EU) 2019/2162; EuGSVG).

Second, Liechtenstein enacted a separate Pfandbrief Act for the “Liechtenstein Pfandbrief”. Under this model, issuance always takes place through a specialised institution separate from the participating banks, following the Swiss model of a central Pfandbrief institution. In 2026, Liechtenstein’s two large banks, LGT AG and Liechtensteinische Landesbank AG, announced the establishment of a Pfandbrief institution under Article 4 PfbG. The first issuance of a Liechtenstein Pfandbrief is expected during 2026.

European Covered Bonds (EuGSVG)

Overview

The EuGSVG serves to implement Directive (EU) 2019/2162 in national law and is heavily based on the Austrian legislative model, which itself follows the wording of the Directive closely. In exercising the national options permitted by the Covered Bond Directive, the Liechtenstein legislature was relatively restrained. The issuance of covered bonds — potentially even within a covered-bond programme — requires approval by the Financial Market Authority in Liechtenstein (FMA). Once approval is granted, the issuing bank becomes subject to a distinct quarterly reporting regime. The Act is structured into General Provisions, Structural Features of Covered Bonds, Enforcement and Set-off Protection as well as Insolvency Provisions, Reporting and Approval, Organisation and Implementation, Remedies, Penalties and Administrative Measures, and Final Provisions (EuGSVG Arts 25 and 26; Directive (EU) 2019/2162).

Scope of Application

As regards its personal scope, the EuGSVG applies only to banks having their seat in Liechtenstein. Of drafting interest is the fact that the term “bank” is not derived from the domestic definition in the Banking Act but directly from the fully harmonised CRR concept of a credit institution within the meaning of Article 4(1)(1) CRR.

Only banks holding an additional licence under the Banking Act may issue covered bonds within the meaning of the EuGSVG. This additional licensing requirement, which may appear somewhat excessive as a matter of subject matter, is mandated by Article 19 of the Covered Bond Directive and is therefore not an instance of national gold-plating.

Dual Recourse and Bankruptcy Remoteness

The two central principles and protection mechanisms of statutorily regulated covered bonds are, first, dual recourse and, second, bankruptcy remoteness. In essence, dual recourse means that the bond investor has not only a contractual claim against the issuing undertaking, as with any security issuance, but also an additional preferential claim against the assets in the cover pool in respect of principal and accrued interest. The cover assets are privileged as a distinct special estate for the protection of investors and thus serve as a second line of defence. Accordingly, only holders of covered bonds and counterparties to derivative contracts may levy execution against the cover assets (EuGSVG Arts 4 and 23).

Under Article 4(1)(b) EuGSVG, however, this additional recourse to the special estate applies only in the event of the bank’s insolvency or resolution. While insolvency as a trigger is self-explanatory, the direct reference to “resolution”, borrowed from the Directive, is more problematic. Bankruptcy remoteness means that payment obligations under a covered bond do not become automatically due, whether by operation of law or contract, merely because the issuing bank enters insolvency or resolution. The covered bond thus continues, even in insolvency, as though it were a legally separate balance-sheet compartment beside the insolvent and liquidated bank. In this way, bankruptcy remoteness is closely linked to the concept of dual recourse (BuA 104/2022 on Art 5; EuGSVG Art 24(2); SAG Art 56(2)(b)).

Cover Pool

Like Article 6 of the Covered Bond Directive, the EuGSVG recognises only three categories of eligible cover assets. Cover assets must be documented separately and entered in a cover register (CRR Art 129; EuGSVG Arts 6, 8 and 14).

Article 6(3) to (10) EuGSVG lays down key restrictions and conditions for recognition in the cover pool, especially with regard to valuation, over-collateralisation and composition. The value of the cover pool is also protected by a prohibition on set-off by debtors of cover assets.

Liquidity Buffer

Each bank issuing under the EuGSVG that is not perfectly maturity-matched shall therefore maintain within the cover pool an internal liquidity buffer sufficient to cover the maximum net liquidity outflow over the following 180 days for the relevant covered bond or the programme as a whole. The time horizon is determined by contractual cash outflows rather than stress assumptions. Where payment streams are contractually deferred, for example because an extendable maturity clause under Article 20 EuGSVG has been triggered, that deferral must be reflected in the calculation (EuGSVG Art 19; Delegated Regulation (EU) 2015/61 as amended by Delegated Regulation (EU) 2022/786).

Extendable Maturities (soft bullets)

Recital 17 of the Covered Bond Directive emphasises that covered bonds are to possess structural features that ensure investor protection at all times. In addition to the liquidity buffer, the EU legislature has therefore recognised “conditions for extendable maturity structures”, commonly known as soft-bullet structures, as a national option. Such structures are intended to manage liquidity risk, including maturity mismatches, more effectively (Directive (EU) 2019/2162, recital 24 and Art 17; Bortolotti and Beaumont, 2021).

By making use of this instrument, the maturity of a covered bond may be deferred by up to one year. Liechtenstein decided to implement this mechanism in Article 20 EuGSVG. The extension may not impair either dual recourse or bankruptcy remoteness, nor may it circumvent the relative prohibition on one covered bond overtaking another in priority.

Internal Controls and Cover-Pool Trustee

Article 15 EuGSVG lays down specific risk-management requirements for issuing banks. Responsibility lies with the risk-management function under the Banking Act. The allocation of own funds and liquid assets must be documented by reference to ICAAP and ILAAP and to the liquidity-buffer requirements of the EuGSVG. For a knowledgeable third party it shall be possible to understand the risk contribution made by covered-bond issuance in the overall context of the institution. The implementation of proportionality should also be documented in detail (EuGSVG Arts 15 and 16; FMA Liechtenstein, communications 2017/4 and 2017/6).

Liechtenstein Pfandbrief Act (PfbG)

Overview

Following the introduction of the EuGSVG in 2023, Liechtenstein adopted in 2025 an additional and separate Pfandbrief Act as a national complement to that European framework. The Act is modelled on the Swiss Pfandbrief system. According to the government, its purpose is to create a legal framework tailored to the specific features of the Liechtenstein market and, in particular, to permit for the first time the joint issuance of Pfandbriefe by several banks through a specialised institution. Government materials indicate that a project group had been working on the matter since 2017 (PfbG Arts 1 and 2; government report on the Pfandbrief Act).

It is notable that the government also justified the project by reference to the protection not only of the financial market, but also of the real-estate market. The Act itself ultimately formulates the objective in more conventional terms: it seeks to protect investors in Pfandbriefe, preserve confidence in the Liechtenstein mortgage and property market, and contribute to financial stability.

The government argued that Liechtenstein’s banking market is highly concentrated and that the failure of a large bank could destabilise the domestic property market if the funding chain were not maintained by Pfandbriefe protected through dual recourse and bankruptcy remoteness. It further argued, after consultation with industry, that the pooling mechanism envisaged by the European framework would be difficult to implement efficiently because of cost and data-protection concerns.

Concept

Under the structure of the Liechtenstein Pfandbrief, the Pfandbriefe are issued by a specialised institution supervised by the FMA, while the assets serving as cover remain on the balance sheets of the funding member banks. This follows the Swiss model. The funding of member institutions — and only banks seated in Liechtenstein may be members — takes place through corresponding Pfandbrief loans granted by the Pfandbrief institution out of the issuance proceeds.

As things stand, exposures to the Liechtenstein Pfandbrief are not treated under the CRR as exposures to a European covered bond, because the institution does not fall within Article 129 CRR and is not a “comparably supervised” institution for the purpose of Article 119(5) CRR. In the standardised approach, such exposures therefore default to the treatment applicable to corporates unless credit risk mitigation can be recognised. Likewise, the Liechtenstein Pfandbrief does not qualify as HQLA under the LCR merely by virtue of being a Pfandbrief, unless the conditions for highly rated corporate bonds with sufficient issuance volume are met.

Investor protection is based on a double pledge structure. First, the Pfandbrief institution holds a pledge over the mortgages granted by member banks to their customers. Second, the Pfandbrief creditors hold a pledge over the loans granted by the Pfandbrief institution to the members. Within the cover pool there is no ranking among creditors. In both cases, the pledge arises upon entry in the respective cover register.

Other Determinants

The Liechtenstein Pfandbrief may be denominated only in Swiss francs. Other Pfandbriefe under the Act may also be issued in euro or US dollars. In all cases, however, the Pfandbrief institution shall ensure currency congruence between the Pfandbrief, the Pfandbrief loans and the cover assets financing it.

As regards maturities, the Pfandbrief loans and the issued Pfandbriefe shall in principle be matched. However, Article 30(2) PfbG creates a contractual call option permitting early repayment by member banks, subject to statutorily prescribed opportunity costs. Article 31 PfbG also adopts the extendable-maturity concept known from the Covered Bond Directive. In the author’s view, this option may only be exercised as an ultima ratio in the insolvency of the Pfandbrief institution where the effectiveness of dual recourse is endangered, notably because cover assets have become illiquid.

SNB Repo Eligibility

The Swiss National Bank recognises securities as repo-eligible only if they are issued by approved issuers. As a rule, securities issued by financial institutions are not repo-eligible, although an exception applies to covered bonds of financial institutions provided that they are not issued by a domestic Swiss financial institution or its foreign subsidiary. Yet under Article 3(1) of the Monetary Treaty between Liechtenstein and Switzerland, the SNB exercises the same powers vis-à-vis banks and other persons in Liechtenstein as it does in Switzerland. In the author’s view, there is therefore no objective reason not to treat the Liechtenstein Pfandbrief institution in the same way in future. For the specialised Pfandbrief institution, an issuer rating would suffice, and for Swiss-franc issues a minimum issue size of CHF 100 million is required (SNB, 2026; VPB, 1981).

Conclusion

By establishing two dedicated statutory regimes before the first domestic issuance has even taken place, Liechtenstein has already made a notable statement in the Pfandbrief field. Although there appears to be little market appetite for use of the EuGSVG, a first issuance under the Pfandbrief Act is likely already in 2026.

The establishment of a Pfandbrief institution represents an efficient way of bringing Liechtenstein institutions into the covered-bond market and of increasing the supply of high-quality Swiss-franc assets. If those assets become repo-eligible with the Swiss National Bank, this would further enhance their attractiveness.

Literature/Sources

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Footnotes

1. Liechtenstein Government: https://bua.regierung.li/BuA/default.aspx?nr=104&year=2022&erweitert=true.

2. As national implementation of the BRRD.

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