New Covered Bonds route under Proper Conduct of Banking Business Directive No. 336 (Pledging Assets of a Banking Corporation)

On 17 June 2026, the Bank of Israel published Circular No. H-06-2854 (the “Circular”), that amends Proper Conduct of Banking Business Directive No. 336 (Pledging Assets of a Banking Corporation) (“Directive 336”) to enable Israeli banking corporations to issue covered bonds^[1], and for this purpose permit them to grant a security interest over specific types of assets, subject to certain conditions. The amendment is effective as of its publication date.

According to the explanatory notes to the Circular, the purpose of this amendment is to enable Israeli banking corporations to diversify their funding sources, particularly foreign-currency funding.

The key amendments to Directive 336 are as follows:

• A new definition of “Covered Bonds” is introduced, and Israeli banking corporations are expressly permitted to issue such instruments.
• The conditions applicable to Covered Bond issuances include, inter alia: (i) a quantitative limitation pursuant to which the aggregate amount of assets pledged for the benefit of Covered Bond holders may not exceed 2% of the bank’s total assets, measured on a cumulative basis at the time of each issuance; (ii) a requirement that the Covered Bonds be denominated in foreign currency and offered outside Israel, to investors incorporated outside Israel; (iii) a requirement that the Covered Bonds be backed by residential mortgage loans secured by residential properties; (iv) the establishment of a dedicated subsidiary (an SPV) to hold the pledged assets for the benefit of Covered Bond holders, provided that the transfer of assets to such SPV does not relieve either the banking corporation or the SPV from any obligations owed to borrowers under applicable law, including Proper Conduct of Banking Business Directives; and (v) additional governance, risk management, audit and reporting requirements applicable to the issuing bank.
• Additionally, the characteristics and terms of the Covered Bonds must be determined in accordance with regulatory frameworks commonly applied in major international markets. The issuing bank must also disclose in the offering prospectus that Israel does not currently have dedicated legislation or regulation governing the characteristics of Covered Bonds.

To review the full text of the Circular (in Hebrew), click here.

Please do not hesitate to contact us with any questions or if you require any clarification regarding any of the matters above.

Sincerely,

The Banking and Finance Department

Herzog Fox & Neeman

[1] Covered bonds are defined in Directive 336 as debt instruments issued by a banking institution and secured by a ‎dedicated pool of debt assets specified by such issuing bank.