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”), which amends Proper Conduct of Banking Business Directive No. 336 (Pledging Assets of a Banking Corporation) (“Directive 336”) to permit Israeli banking corporations to grant a security interest over their assets in connection with the issuance of covered bonds, subject to certain conditions. The amendment is effective as of its publication date.

The Circular introduces an additional route permitting Israeli banking corporations to grant security interests over their assets, by way of issuance of covered bonds[1]. 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.

[1] Covered bonds are debt instruments issued by credit institutions and secured by a ‎dedicated pool of high-quality cover assets. These instruments are widely recognized in ‎international markets, and are characterized by a so-called “dual recourse” mechanism: ‎in addition to a claim against the issuing credit institution, bondholders benefit from a ‎direct and preferential claim against the earmarked cover assets in the event of ‎insolvency or resolution of the issuer.