New Swedish regulations support covered, says Moody’s

Changes to Swedish regulations to improve monitoring and contain risks such as falling property values support Swedish covered bonds as a “safe and effective” funding instrument, Moody’s said on Tuesday.

Moody’s highlighted the following changes included in the Swedish Financial Supervisory Authority’s new Swedish Covered Bond Regulations, which will come into effect on 1 July:

•  New stress tests on property values, in particular, a requirement to test at least annually for property price declines of 5%-30%, in 5% intervals, and report results to the FSA;

• An option for issuers to re-value mortgage collateral upwards and downwards, potentially based on indices in the case of residential property;

• Clarification of swap counterparty criteria and more direct scrutiny by the FSA if counterparty credit quality declines; and

l Adjustments in the duties of the independent inspector so as to increase his or her focus on proactively identifying risk areas. The inspector must review property revaluations annually and consider where the greatest risks of price falls may lie, and review IT and systems risks.

Moody’s said covered bonds are a key element in the infrastructure of Swedish housing finance.

“Swedish banks rely heavily on covered bond funding and the Swedish authorities are supportive of the covered bond product,” said Jane Soldera, Moody’s vice president senior credit officer.

“The changes aim to support the already strong market confidence in Swedish covered bonds and, in practice, should improve covered bonds’ resilience if an issuer becomes insolvent,” she added.

The Swedish FSA first proposed amendments to its covered bond rules in July. The new covered bond regulations and guidelines were published on 16 January.