FSA backs case-by-case stance, Norges opposes bank licences

Norway’s FSA appears to have come out in favour of a bank-by-bank approach to assessing risks associated with covered bond issuance, according to feedback given to the ministry of finance, while Norges Bank has opposed giving covered bond companies regular access to its liquidity facilities.

FSA director general Morten Baltzersen had said in mid-October that curbs on covered bond issuance should be considered, raising fears that a hard cap could be imposed. However, concerns about such regulation had eased in December when the ministry of finance asked the FSA and Norges Bank for feedback on the appropriateness of introducing a soft or qualitative limit on covered bond issuance. More specifically, the ministry of finance asked for feedback on the level of assets being transferred by banks to dedicated mortgage companies for use as collateral for covered bond issuance, and views on the links between parent banks and their covered bond issuing subsidiaries.

The Norwegian government and regulator are concerned about increased Norwegian house prices and have been weighing up ways to rein in mortgage lending, such as by limiting covered bond issuance and/or increasing risk weights on mortgages.

The FSA (Finanstilsynet) released its response to the ministry of finance on Monday and, according to Stein Sjølie, director at Finance Norway, the FSA did not in its response propose to tighten any rules about the transfer of mortgages or restrictions on liquidity facilities or other guarantees from parent banks in favour of mortgage subsidiaries, but said that it already has, under Pillar 2 of the Basel framework, at its disposition the necessary tools to monitor and deal with risks arising in this context and could, if it wanted, impose higher capital requirements or cap the amount of mortgages transferred to covered bond issuers.

“We have to discuss this with the members of the council to see if they feel this is a sign that the authority will tighten rules or practice,” said Sjølie, “but on the face of it I did not see any tightening of covered bond regulations. It’s not a dramatic statement.”

Based on an unofficial translation, the FSA said that a qualitative rule on the transfer of mortgages for use as covered bond collateral must acknowledge the differences between Norwegian covered bond issuers and that the circumstances of each individual banking group need to be taken into account and assessed.

The FSA also highlighted improved disclosure as a means of combatting concerns and hence the adverse effects of asset encumbrance, saying that banks can help provide “predictability” and transparency by disclosing information that makes it easier for creditors to assess the quality of collateralisation and the quality and scope of unpledged assets. This would be consistent with the intent of disclosure requirements under Pillar 3 of the Basel II accord, according to the FSA.

Increasing transparency should not be problematic for Norwegian banking groups and their covered bond issuing subsidiaries, said FNO’s Sjølie.

“If the market is asking for more transparency on cover pools and other sources of asset encumbrance then banks will be willing to do so,” he said.

Overall he expects the ministry of finance to accept and follow the FSA’s recommendations. He said that a response from Norges Bank last Thursday (28 February) was more of a “distant view from the sidelines”.

Based on a translation of the letter, which was published in Norwegian, Norges Bank said that it endorses the FSA’s and ministry of finance’s view that limits should be considered on the financing of residential and commercial mortgages via covered bonds (obligasjoner med fortrinsrett, or OMF) but that any limiting measures must take into account other regulations underway to reduce risk in the banking sector.

The central bank had also been asked to set out its views on whether covered bond issuing mortgage companies should be able to borrow from Norges Bank on the basis of a restricted banking licence. In Norway covered bond issuers are licenced as credit institutions, but not as banks, and the finance ministry has raised the question of whether they should be granted a restricted banking licence — allowing them to grant loans but not take deposits from the public.

In its comments on the subject of central bank borrowing Norges Bank refers to arguments put forward by Finance Norway for mortgage companies’ access to central bank liquidity facilities to reduce refinancing risk. However, it emphasised that the central bank’s liquidity facilities are designed to implement monetary policy and payment settlement, and not to limit liquidity risk or act as a funding source of a single entity, and that on these grounds OMF companies should not be given general loans from Norges Bank, and that a restricted banking licence “does not seem relevant in this context”.

Sjølie said that Norges Bank’s stance on access to central bank liquidity for covered bond companies is not surprising given its general position on the role it should play in the Norwegian financial system.

“Compared with the ECB and other central banks Norges Bank takes a restrictive line,” he said. “It does not want to front the financial sector, to be the one providing extraordinary liquidity.

“The swap scheme set up in 2008 provided extraordinary liquidity and was managed by Norges Bank, but the ministry of finance was the formal counterparty.”

In its letter to the finance ministry the central bank noted that in certain circumstances — where financial stability is deemed to be at threat — it is entitled to provide extraordinary liquidity support to other financial institutions besides banks, i.e. including OMF issuing entities, but that it is “neither possible nor desirable” to predefine such situations.

Higher risk weights proposed

Meanwhile in a separate letter to the finance ministry on Monday the FSA proposed a tightening of risk weights for residential mortgages, putting forward various possible measures to implement this.

“The Norwegian Financial Supervisory Authority has pointed out that current risk weights on mortgages are too low, and should be increased,” Emil Steffensen, deputy director general, FSA, told The Covered Bond Report.

He said that the FSA described possible measures to increase risk weights for mortgages but has not proposed a specific model.

“The FSA suggests that specific measures be considered when CRD IV has been adopted and the consequences for national discretion and reciprocity have been assessed,” said Steffensen.

The finance ministry in December proposed increasing risk weights to 35%.