Planned implementation of the Liquidity Coverage Ratio (LCR) by Sweden two years ahead of schedule is likely to follow the Basel Committee’s proposed treatment of covered bonds, according to market participants, but could take advantage of exemptions under Basel III for countries with low government debt.

In a Financial Stability Report published on November 29, Sweden’s central bank recommended that the Financial Supervisory Authority (Finansinspektionen) implement the Basel Committee on Banking Supervision’s proposal for a Liquidity Coverage Ratio (LCR) by January 2013. Market participants predict the Swedish FSA will mostly follow the rules laid out under Basel III, even if the European Union’s CRD IV has not yet been finalised and could vary from the Basel Committee’s standards.

“Sweden will as much as possible coordinate the rules with CRD IV,” said an investor relations official at a Swedish covered bond issuer, adding that the specific central bank requirement should apply only to Sweden’s four major banks, while a future LCR regulation would apply to all banks in Sweden from at least 2015.

The official said that any deviation from the commonly agreed proposed CRD IV would need to be approved centrally in Europe.

A treasury official at a Swedish bank also said that Sweden would follow the Basel Committee’s proposals.

“Generally, the rules might be – in some areas – more demanding for Swedish banks than the rules according to Basel,” he added, although this is most likely to be in the amount of tier one capital banks have to hold.

Under Basel III proposals, Level 2 assets, which include covered bonds, may comprise up to 40% of LCRs, while Level 1 assets, comprising cash and government bonds, do not face any such limit. Level 2 assets are subject to a haircut of a minimum of 15%.

Since Sweden has a relatively low volume of government bonds outstanding, the country may be able to call for one of the exemptions in the Basel III proposal and be allowed to have a larger share of Level 2 assets than 40%, according to Charlotte Asgermyr, analyst at SEB. Level 2 assets above 40% will, however, be subject to an additional haircut.

“An additional haircut is not yet published by the Basel Committee,” she said.

The investor relations official said that the general view is that higher rated covered bonds should be treated favourably, particularly in light of the sovereign debt crisis, and that countries with limited sovereign debt outstanding should be looked at closely and potentially apply somewhat different requirements for them in certain features of the ratio.

“The Swedish FSA and the Riksbank have actually argued for better treatment of covered bonds,” he said, “so if Sweden introduces the LCR requirement before 2015, we believe there will be some waivers or better treatment of covered bonds included in the rules.”

The treasury official said covered bonds will be affected very little, “given that Swedish banks comply with LCRs already”.

Asgermyr at SEB added that Swedish banks have increased their holdings of government bonds and cash over the past few quarters.

“Swedish bank treasuries have also increased their holdings of covered bonds slightly,” she said. “We expect bank treasuries will continue to be buyers of short term covered bonds going forward.”