New Norwegian act to tweak Boligkreditt insolvency treatment

Nov 28th, 2014

A new Norwegian Act on Financial Institutions being considered by parliament will amend the country’s covered bond framework so that covered bond issuers are treated the same as banks in the event of insolvency, and will also repeal Norway’s securitisation law.

Bahr_Building_Tjuvholmen_AppThe new law will be a comprehensive act on financial institutions and replace Norway’s Financial Institutions Act, Saving Bank Act, Commercial Bank Act and Guarantee Schemes Act, according to Finn Myhre, senior lawyer at Norway’s BA-HR, who was speaking at an event jointly organised by the law firm and Fitch Ratings in Oslo on Wednesday.

Under the proposed act, covered bond companies — typically called Boligkreditts — will no longer be able to be declared bankrupt, but will instead be placed under public administration if facing solvency or liquidity problems. Myhre said that this is beneficial, in that it will give the authorities more flexibility to deal with covered bond companies, while maintaining the rights of covered bond-holders.

He said that Norwegian covered bond legislation, which came into force in 2007, has proven “very robust” and “very effective”, and the fact that it is not being significantly changed in the new act supports that view.

The proposed financial institutions act will also repeal Norway’s securitisation law. Myhre noted that this has only ever been used by one Norwegian financial institution, namely Santander Consumer Bank. The issuer’s outstanding securitisations of auto loans will not be affected by the repeal of the securitisation rules.

The act was put forward to the Norwegian parliament (Stortinget) by the government in June and is with the parliamentary finance committee. This body has until 16 December to make its recommendations to parliament and although no difficulties are anticipated, according to Myhre, the committee’s consideration of the act has been held up by its focus on the 2015 budget. He said that if the act is passed by parliament by the end of January it could come into force wholly or partly by July 2015.

Myhre said that alongside the rules laid down by the act, it authorises the Ministry of Finance to set more detailed regulations in a number of areas. As reported previously, the Ministry of Finance will be able to set a legal minimum overcollateralisation level, something that will allow Norwegian covered bonds to achieve preferential treatment or exemptions in regulations.

The overarching aim of the act, in its own words, is to contribute to financial stability, including the functioning of financial institutions in a satisfactory and prudent manner.

Jens Hallén, senior director, financial institutions, at Fitch, meanwhile highlighted that, although weakening, state support for financial institutions in Norway — as well as in Sweden — is still considered more likely than in the rest of Europe, following the introduction of the Bank Recovery & Resolution Directive (BRRD). He noted that in discussions about bail-in — being led at a global level by G20 and FSB initiatives — Sweden had been one of the biggest advocates of governments retaining flexibility to support financial institutions — pointing to its experience of the 1990s banking crisis and need for financial stability in light of a wholesale funded industry — and that Norway was a similar case.

While the rating outlook for financial institutions in many parts of the EU/EEA is “pretty bleak” as a result of support becoming less likely, according to Hallén, the Nordics are among the few countries where all outlooks are stable — although he noted that this was not the result of the greater possible level of state support, but due to Nordic bank ratings being more driven by Viability Ratings than Support Rating Floors, under Fitch’s methodology, with the Nordic financial institutions typically having higher VRs (of a to aa-).

Cosme de Montpellier, senior director, covered bonds, at Fitch, noted that most EU covered bonds are exempt from bail-in and indeed benefit from the BRRD in that bail-in helps preserve the dual recourse nature of the instruments, thereby avoiding the need for cover pools to become the sole source of covered bond payments.

Under Fitch’s methodology this is reflected by the addition of an uplift from the Issuer Default Rating that the rating agency now includes in reaching the higher rating of covered bonds, and de Montpellier noted that Norway, Sweden and Denmark are considered covered bond-intensive jurisdictions — one of three factor Fitch considers in determining its IDR uplift.

Photo: BA-HR, Oslo

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