Planned CRR waiver positive for Swedish covered, says Moody’s

Feb 13th, 2015

A partial waiver from certain CRR requirements proposed by the Swedish FSA to reduce concentration risk would be credit positive for Swedish covered bonds, according to Moody’s, as it would allow programmes to maintain protections against market risks.

FinansinspektionenOn Monday of last week (2 February), the Swedish FSA (Finansinspektionen, or FI) proposed an exemption for Swedish issuers from the requirements of Article 129(1)(c) of the Capital Requirements Regulation (CRR), which rule that exposures to credit institutions that are used as substitute collateral for covered bonds (which are to achieve preferential treatment) must not exceed 15% of the nominal amount of the issuer’s outstanding covered bonds and be credit quality step 1 (CQS 1) — or at least Aa3.

Competent authorities are able to partially waive this requirement and allow CQS 2 up to 10% of the total after consulting with the European Banking Authority (EBA).

As previously reported, the Danish FSA (Finanstilsynet) received the EBA’s endorsement of such a waiver on 19 December after highlighting that the rule increased concentration risk, since only one Danish credit institution qualifies as CQS 1.

Arguing that a similar concentration problem could arise in Sweden, FI said it hopes to be able to introduce a waiver on 31 March.

Moody’s this Monday noted that under the standard CRR requirements only two Swedish banks — Nordea Bank and Svenska Handelsbanken — would be eligible swap counterparties with sizeable Swedish krona currency swap offerings among Nordic banks, while most Swedish covered bond programmes use swap arrangements with swap counterparties rated single-A.

The rating agency said the proposal, if implemented, is credit positive as it would allow Swedish programmes that benefit from structural enhancements from single-A-rated counterparties to maintain their current protection against market risks.

Without the waiver, these programmes would either have to maintain their preferential treatment by cancelling exposures to single-A-rated entities — therefore losing the structural enhancements that the removed counterparties provided — or maintain the structural enhancements and lose preferential treatment under the CRR — increasing refinancing risk because demand from bank investors would likely drop sharply, Moody’s said.

“If covered bonds lose their preferential treatment, the programmes would face higher refinancing risk and the bonds’ liquidity would decrease,” the rating agency said. “Bank investors hold around 40% of publicly-placed covered bonds and losing preferential treatment in the liquidity coverage and capital adequacy calculation would result in higher capital costs for bank investors holding such bonds.

“This, in turn, would increase the risk that in the event of an issuer insolvency, the realisable value of the cover pool would be less than what was required to repay investors.”

The Swedish FSA announced that it would hold a meeting for the consultation on Tuesday.

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