Interview: Jonny Sylvén, ASCB

Jonny Sylvén, senior advisor, Association of Swedish Covered Bond issuers (ASCB), spoke to Nordic Financial Institutions & Covered about latest Swedish regulatory developments, asset encumbrance, and labelling.

The Swedish FSA recently published final updated covered bond guidelines and regulations — what are the main changes and what impact will they have?

We had a look at the regulations before they were finalised and although there were some changes in the proposals that were not carried over to the final version because we argued that they were not suitable for the market there are still some changes. Some of them are good and some are more troublesome.

Jonny Sylvén, Association of Swedish Covered Bond issuers (ASCB)

One of the changes is that with the new regulation issuers will have the possibility to raise the valuation of the collateral — houses — which was not possible under the old regulation. Then the valuation could only be lowered. This will maybe result in improved LTV levels in cover pools, but it’s important to understand that in Sweden you can always renegotiate your mortgage loan and when you renegotiate it is possible to do a re-evaluation as well.

Another new feature of the updated regulations is stress tests on house prices. The tests are quite severe, up to a house price fall of 30% and that could be quite difficult, I think. These tests will apply to all the requirements under the regulations, for example the maximum LTV cap of 75% — if you run a test based on 30% lower house prices some of the loans will not be eligible for the pool so the issuer must then explain what they will do if this happens. This is also the case with the mismatch and interest rate risk requirements. All the requirements must be fulfilled during this stress test and all this will be checked by the independent observer, who will report to the FSA. Issuers do not have to make the results of the stress tests public, and whether they decide to do so is up to individual issuers.

Last but not least the independent observer will have more responsibility under the updated regulations. One thing that is different from before is his responsibility to look into the valuation principles for houses. The idea is also that the independent observer would be more risk-oriented so all his assessments would be more focussed on different risk aspects of the business. So those are the main changes regarding the new regulations. We think that certain aspects of the regulations are better written now and better explained and a bit more in line with other kinds of regulation so that is positive. Certain of the changes that I highlighted are positive for the issuers and not a problem because they reflect current practice.

In October a joint Riksbank and FSA council called for greater transparency about asset encumbrance — have the authorities shed any more light on their position on this, and to what extent is their focus on transparency rather than issuance restrictions to be welcomed?

There have been some more articles written by the Riksbank about asset encumbrance but no firm communication about any requirements or the like. The FSA could come up with requirements in regulation or the Riksbank could issue a recommendation that banks disclose more about asset encumbrance, which seems to be the more likely of the two. We think it would be important to have better transparency so that it is not only covered bonds that are in focus when it comes to encumbrance because there are other kinds of encumbrance, especially repo activities and such. Better transparency would maybe be positive for covered bond issuers, and some of the banks in Sweden have already been focussing on this in their quarterly reports.

All of the main Swedish euro covered bond issuers have signed up to the ECBC Covered Bond Label — how straightforward a decision was it for the Swedes to get on board this initiative and what benefits do you see in it?

All the Swedish issuers have signed up for the label except for Landshypotek, but that will happen soon. The Swedish issuers think the Label was a good initiative to be outspoken about the need to keep covered bonds locked in to a few types of bonds so the asset class is not watered down. There have been some attempts to bring in some securitisation type covered bonds and we think that is very negative and it is something we don’t like here. We think it is very positive to straighten out the issue and say ‘this is a covered bond, this is not’ so we thought the Label was a good idea and we all joined it early. We see no downside to it.

Within our organisation we are also discussing how to promote the Label as we feel this is important. By that I mean first of all in issuers’ meeting with investors that issuers discuss the Label, and how the Label website functions and possible ideas about how the Label will function in the future. And secondly it’s about trying to promote the Label with decision-makers, such as Riksbank and regulators in relation to how the Label might be integrated in regulations. Maybe that labelled covered bonds could have different LCR treatment than non-labelled covered bond, for example.

The ECB has said that if covered bonds bearing the Label distinguish themselves from non-labelled ones it would consider adjusting repo haircuts. Do you expect the Riksbank to behave similarly?

I think the Riksbank will do the same as the ECB so if the ECB would have different haircuts for labelled versus non-labelled covered bonds I think the Riksbank would do the same. But it may be easy for the Riksbank because all Swedish covered bonds, once Landshypotek’s application is finished, will be labelled.

What was the process like developing the Swedish national transparency template and how close to the ICMA Covered Bond Investor Council’s proposed template is it?

We thought it was important to start with something that was feasible for all the issuers to complete so our template doesn’t have as many data fields as the ICMA CBIC called for. I would say that our template is rather small but all the issuers have the possibility to complement it with other information that their investors are interested in. We thought it was very important to have precise definitions of different key ratios and different aspects of the cover pool and so we had a lot of discussions about this, and in a lot of detail. I used to be an analyst and I felt that comparability was important. Maybe the issuers were bored with all my questions but I think we have a very good template that allows for comparability between issuers, at least in Sweden.

We discussed LTV ratios, for example, and we have a very precise definition of what this means and this is on our website. It seems that this is not common among other countries to provide this kind of exact definition of LTV ratios. We are focussed on comparability rather than having a massive report with lots of figures that can’t be explained. But we have the intention to increase the amount of information if investors require it.

In some jurisdictions issuers are looking at new cover asset classes such as SME loans. Can we expect any new cover asset classes from Sweden?

We’re not discussing this in our organisation and maybe that’s the answer — that we have no interest in finding new assets to fund via covered bonds. Because of the discussions regarding asset encumbrance it would not be that easy for Swedish banks to use covered bonds to fund more kinds of loans. We stress that Swedish covered bonds will only be for mortgages and public sector loans and nothing else. In Sweden there are other funding sources for other kinds of loans.

In November the FSA proposed higher mortgage risk weightings — a 15% floor. How do you view this and what implications does it have for Swedish covered bonds?

There are a lot of discussions about risk weights on mortgages. It’s not always nice to live in a country like Sweden that is so progressive because we always go ahead of others in certain aspects. But what I understand is that we have a new regulation regarding the risk weights that will increase average risk weights for all mortgage lenders so that will probably lead to higher capital requirements, but I wouldn’t say that the effect will be very dramatic for covered bond issuers or the supply of mortgage loans in the pools.

Liquidity coverage ratio requirements based on Basel III entered into force early in Sweden, at the beginning of this year, before CRD IV has been finalised. How are covered bonds treated under the implemented Swedish rules and to what extent is this likely to change?

Sweden introduced the LCR in the new year and that makes for a very difficult situation because the Swedish regulation is based on the first CRD IV presentation, and that is based on the first Basel III accord and now Basel III has changed and CRD IV probably will as well. Covered bonds are Level 2 LCR assets with a 40% cap and 15% haircut.

We tried to convince the regulators that Swedish covered bonds are special and that there is a liquid domestic market that it is important but the FSA did not take a more favourable approach. They followed the Basel III approach, which was disappointing.

There are a lot of discussions about how CRD IV will turn out when it comes to the LCR and there are rumours about it being more covered bond friendly. Sweden will of course follow the regulation in Europe when CRD IV is finalised, but it is hard to know whether that will be when it’s implemented in Europe or earlier.