Banking licences for Boligkreditts plan good for covered, says Moody’s

Moody’s has deemed credit positive for covered bonds a Norwegian Ministry of Finance proposal for Norwegian covered bond issuers to be granted limited banking licences, saying that it would increase the likelihood of timely payment for bondholders.

On 19 December the ministry asked the Norwegian central bank and the Norwegian Financial Services Authority (Finanstilsynet) to consider granting such licences to the specialist mortgage companies (usually called “Boligkreditt”) that issue covered bonds in Norway. These institutions, which are typically subsidiaries of banks or groups of banks, have hitherto been licenced as credit institutions.

“As such, the central bank’s loan facilities are not directly available to them,” noted Moody’s. “Consequently, in order to obtain central bank liquidity, issuers currently rely on their parents to repo covered bonds with the central bank and then channel the proceeds to them.”

The rating agency said that the ability to place covered bonds with the central bank would mitigate refinancing risk and legal restrictions not to encumber assets.

“A banking license would be a credit positive as it could enable issuers to pledge self-issued covered bonds at the central bank as security collateral in return for liquidity, which mitigates refinancing risk should a bond become due when the market is closed,” said Moody’s. “The ability for the issuer’s administrator to pledge its own covered bonds to the central bank would increase the likelihood that covered bondholders receive timely payments even after the default of both the issuer and parent bank, which is credit positive.

“This provision would be particularly supportive as, under Norwegian covered bond law, cover pool assets may not be directly pledged or similarly encumbered in favour of particular creditors.”

Such a move follows a trend to do likewise in other countries, noted Moody’s, with the Pfandbrief Act having in 2009 been amended to allow a cover pool administrator (Sachwalter) to operate the cover pool of a Pfandbrief bank with limited business activity, improving access to central bank repo facilities.

The rating agency also said that the move reaffirms the government’s close involvement in the development of the covered bond market, and is part of a series of positive regulatory steps aimed at maintaining a competitive and robust covered bond framework.

“We see the initiative as a positive signal regarding the systemic relevance of covered bonds for the Norwegian market, giving mortgage companies the opportunity to directly access central bank liquidity,” said Moody’s. “The development needs to be seen in a wider context of Norwegian regulators’ efforts to further strengthen the covered bond framework, to assure financial stability of Norwegian banks and to prevent an overheating of the residential lending market.

“Credit positive developments include (1) the recent discussions over the imposition of a floor on risk weights for residential mortgages that could be as high as 35% when calculating a bank’s minimum capital requirement; and (2) the tightening of bank’s lending guidelines to limit new loans to normally a maximum 85% of the property’s market value in case of instalment loans and maximum 70% in case of credit line mortgages.”

See Crédit Agricole CIB analysis for more on Norway’s regulatory moves.