Norway’s FSA appears to have come out in favour of a bank-by-bank approach to assessing risks associated with covered bond issuance, according to feedback given to the ministry of finance, but proposed a tightening of risk weights for residential mortgages, which an FSA official told The CBR were too low.

FSA director general Morten Baltzersen had said in mid-October that curbs on covered bond issuance should be considered, raising fears of a hard cap being imposed. However, concerns about such regulation had eased in December when the ministry of finance asked the FSA and Norges Bank for feedback on the appropriateness of introducing a soft or qualitative limit on covered bond issuance. More specifically, the ministry of finance asked for feedback on the level of assets being transferred by banks to dedicated mortgage companies for use as collateral for covered bond issuance, and views on the links between parent banks and their covered bond issuing subsidiaries.

Last week the Norwegian central bank expressed support for the ministry of finance’s suggested approach. (See here for previous coverage.)

The Norwegian government and regulator are concerned about increased Norwegian house prices and have been weighing up ways to rein in mortgage lending, such as by limiting covered bond issuance and/or increasing risk weights on mortgages.

According to Stein Sjølie, director at Finance Norway, the FSA did not in its response propose to tighten any rules about the transfer of mortgages or restrictions on liquidity facilities or other guarantees from parent banks in favour of mortgage subsidiaries, but said that it already has, under Pillar 2 of the Basel framework, at its disposition the necessary tools to monitor and deal with risks arising in this context and could, if it wanted, impose higher capital requirements or cap the amount of mortgages transferred to covered bond issuers.

“We have to discuss this with the members of the council to see if they feel this is a sign that the authority will tighten rules or practice,” said Sjølie, “but on the face of it I did not see any tightening of covered bond regulations. It’s not a dramatic statement.”

In a separate letter to the finance ministry on Monday the FSA did, however, propose a tightening of risk weights for residential mortgages, putting forward various possible measures to implement this.

“The Norwegian Financial Supervisory Authority has pointed out that current risk weights on mortgages are too low, and should be increased,” Emil Steffensen, deputy director general, FSA, told The Covered Bond Report.

He said that the FSA described possible measures to increase risk weights for mortgages but has not proposed a specific model.

“The FSA suggests that specific measures be considered when CRD IV has been adopted and the consequences for national discretion and reciprocity have been assessed,” said Steffensen.

The finance ministry in December proposed increasing risk weights to 35%.

The FSA’s covered bond-related letter to the government is much more comprehensive than Norges Bank’s, amounting to a 19 page document (available only in Norwegian). Based on a rough translation, the FSA said that a qualitative rule on the transfer of mortgages for use as covered bond collateral must acknowledge the differences between Norwegian covered bond issuers and that the circumstances of each individual banking group need to be taken into account and assessed.

Like Norges Bank, the FSA also highlighted improved disclosure as a means of combatting concerns and hence the adverse effects of asset encumbrance, saying that banks can help provide “predictability” and transparency by disclosing information that makes it easier for creditors to assess the quality of collateralisation and the quality and scope of unpledged assets. This would be consistent with the intent of disclosure requirements under Pillar 3 of the Basel II accord, according to the FSA.

Increasing transparency should not be problematic for Norwegian banking groups and their covered bond issuing subsidiaries, said FNO’s Sjølie.

“If the market is asking for more transparency on cover pools and other sources of asset encumbrance then banks will be willing to do so,” he said.

Overall he expects the ministry of finance to accept and follow the FSA’s recommendations, and that Norges Bank’s input was more of a “distant view from the sidelines”.