Norway’s finance ministry has asked the country’s FSA to explore a qualitative limit on the amount of assets a parent bank can transfer to a covered bond issuer, and has asked the central bank to consider granting the specialised institutions restricted banking licences.

Norwegian ministry of finance

The ministry today (Wednesday) published letters it sent to Finanstilsynet, the financial supervisory authority, and Norges Bank in connection with a review of the framework for Norwegian covered bond issuance amid concerns about its impact on rising property prices and the standing of Norwegian banks’ unsecured creditors, and concomitant risks for financial stability.

The correspondence is a follow-up on communication between the ministry and Finanstilsynet dating back to June, with the regulator having in an October letter to the finance ministry set out, as requested, its views on whether Norway’s covered bond legislation was “working as intended” and whether measures should be taken to strengthen the system.

Finanstilsynet in October flagged the possibility of it imposing higher capital charges on covered bond issuers or restricting issuance if it considers that they are tying up too much collateral in covered bonds.

In the ministry of finance’s most recent letter to Finanstilsynet it acknowledged the supervisory authority’s feedback, and charged it with carrying out a detailed assessment of whether a qualitative rule on the transfer of assets to covered bond issuers should be set, and to review the economic ties between banks and the mortgage companies that issue the covered bonds.

The finance ministry said it believes consideration should be given to setting a qualitative rule that a bank should not transfer more of its assets than is “prudent” to a covered bond issuer. It has also asked for an assessment and draft of a provision allowing Finanstilsynet to impose additional capital requirements on a bank in case of significant transfers of mortgage loans.

Stein Sjolie, director at Finance Norway (FNO), which provides the secretariat for the Norwegian Covered Bond Council, welcomed the move to a qualitative approach to limiting asset transfers rather than the setting of a hard limit.

“This is definitely better,” he said. “The ministry, more than the FSA, understands that a hard rule is not the appropriate instrument in this case. An assessment by the FSA at the time of asset transfers is not actually that extraordinary.

“I don’t think this is dramatic for banking groups. It won’t be far from assessments they do internally in any case, the difference being that going forward it may be with the eye of the supervisor, too.”

The finance ministry has also written to Norges Bank to ask it to review Norway’s covered bond legislation and propose any measures to strengthen its resilience, and, more specifically, to come to a view on whether Norway’s covered bond issuing mortgage companies should be eligible for a limited banking licence so that they can access the central bank’s liquidity facilities, thereby reducing the need for guarantees and credit facilities from a mortgage company’s owner bank. In Norway covered bond issuers are licenced as credit institutions, but not as banks.

The finance ministry has asked Norges Bank to respond by 15 February, and Finanstilsynet by 1 March.