Interview: Stein Sjølie, Finance Norway

Stein Sjølie, director, Finance Norway, spoke to The Covered Bond Report’s Neil Day about the Norwegian FSA’s announcement that it could restrict covered bond issuance by Norway’s banks.

Do you agree with Finanstilsynet’s plan to restrict covered bond issuance?

We understand that the supervisor may be a bit worried about price developments in the residential market because house prices have gone up relatively steadily for a long period. But we see the regulator’s proposal for regulating the covered bond market as not being well aimed in order to contain price developments in the housing market.

We fear that this sort of regulation, which could restrict how much a banking group may issue in covered bonds, will be detrimental to financial institutions’ access to the markets. It could be detrimental to the development of the general bond market in Norway, which we are eager to stimulate. And it may also be harmful to financial stability, because we see covered bonds and the development of a larger and better bond market in Norway as ways of securing financial stability in the future.

So you see any such regulation as misguided?

Yes. We also don’t believe that any such restrictions on covered bonds would have a dampening effect on the housing market.

House price developments are the result of the general macroeconomic policy in Norway whereby the government uses part of its very large income from the petroleum sector to stimulate the Norwegian economy in various ways. At the same time, we also have an expansionary monetary policy, as well as tax incentives for investing in housing.

All this is stimulating the demand for housing. There is not any housing bubble like the ones you had in Ireland or in Spain, where there was speculative construction. Here new house building is relatively moderate — some say construction is too low. I will not comment on that, but we don’t see any speculative construction bubble.

There may always be a worry that at some point house prices may fall, but if that is a serious worry on the part of the authorities, they should use the same instruments they now use for stimulating the economy, that is monetary policy or fiscal policy, in order to dampen demand. Trying to put some sort of restrictions on banks’ or credit institutions’ issuance of covered bonds will not have an effect on this. It will only have a detrimental effect on the Norwegian bond market.

But other countries have introduced covered bond issuance limits for other reasons, for example their potential impact on unsecured creditors. Is there an argument for introducing some limit for these reasons?

Well, let’s see what has been done in the leading European markets in that respect. The covered bond markets with the longest experience are the German and the Danish, while the Swedish and French markets are also large. I have not seen any such restrictions in any of these markets and they have successfully been able to tackle the financial crisis. In 2008-2009 their covered bond markets were the markets that worked the best.

Finanstilsynet refers to other countries like Italy, Greece, Canada and Australia. We find it a bit odd that these are the countries they refer to rather than closer and more comparable economies.

The regulators in those successful countries have not said that they want to regulate the volume of assets that the banks or credit institutions may put in their cover pools, which is what the Norwegian regulator is pondering. That is a very odd way of regulating this, I would say, in particular in Norway where you have a specialist banking principle. The credit institutions that issue covered bonds in Norway are not deposit-taking, so there are no depositors, so who are you supposed to be protecting?

The regulator did also refer to other countries, the Netherlands and the UK, where there have been discussions between the supervisors and the individual institutions prior to their first covered bond issuance, where the issuer has given some guidance as to what extent it would use the instrument. But that has been more on an ad hoc basis than a regulation, as I understand it, the sort of discussions that you always have between an issuer and regulator.

What do you expect to happen now?

We had contact with the regulator prior to this and had a rather open discussion because the regulator was in June asked by the Ministry of Finance to review all our Norwegian covered bond regulations given that the strong growth in the five years since the market’s start in 2007. On our side, we had taken up just a couple of small questions with the Ministry of Finance where we wanted to have some clarification, but these were only minor details.

So far we have found regulations for Norwegian covered bonds to be appropriate. They have worked well and the rating agencies have given them a good score. And we have made a template in accordance with the ICMA Covered Bond Investor Council standards. So our view so far has been that this has been a proper regulation — made in harmony with the Government five years ago.

We were therefore a bit puzzled when we saw this proposal for a new regulation. However, I’m a little unsure whether it is a proposal for a regulation or just the supervisor thinking aloud.

One might ask questions concerning the high growth of this market. But one reason why there has been such high growth was because we started the covered bond project in Norway 15 years ago. We wanted to have this ready earlier, but there were so many details that were not put in place earlier and our first legal framework had to be completely redone. So it was only after 10 years that the whole law was put in place, and there was then a pent-up demand. That’s why it grew strongly from the very start in 2007.