Sweden’s FSA and National Debt Office have questioned the rationale behind proposals from the Riksbank that would tighten its rules on the use of covered bonds as repo collateral, and disputed that certain structural risks and vulnerabilities are not reflected in covered bonds’ ratings.

The Riksbank on 21 October proposed four amendments to its criteria for repo collateral that are aimed at increasing diversification of the collateral pledged to the central bank and at reducing the credit risk therein.

The proposed amendments are:

That covered bonds issued by the counterparty itself shall no longer be accepted as collateral for credit at the Riksbank. This is a return to the terms and conditions for collateral that applied before the global financial crisis hit the financial system in 2007.

The requirement for the lowest credit rating for securities to be accepted as collateral to be raised from the current A-to AA-.

The introduction of a concentration-limit rule under which covered bonds, as a share of a counterparty’s total collateral value, may amount to a maximum of 60%.

The introduction of a concentration-limit rule under which a maximum of 50% of the share of a counterparty’s collateral value that comprises covered bonds may consist of covered bonds from the same issuer.

In a joint letter published on Friday, the Swedish FSA (Finansinspektionen, or FI) and the Swedish National Debt Office (Riksgälden) criticised the proposals and said they must be investigated further and discussed in the Financial Stability Council.

Charlotte Asgermyr, an analyst at SEB, said that the letter questioned the motives behind the Riksbank’s proposals more than the content of the proposals themselves.

“The FSA and the debt office are not against changing the rules,” she said. “But they think that if the Riksbank tries to force banks to hold less covered bonds and more government bonds in the interest of financial stability then that is something that must be discussed in the Stability Board.”

The Riksbank noted in its proposals that Swedish covered bonds currently receive the highest possible ratings, but said it believes there are certain structural risks and vulnerabilities associated with covered bonds that are not reflected in the ratings.

According to Asgermyr, the FSA and the debt office do not share the Riksbank’s view on this matter and they do not think the Riksbank explains clearly enough how it comes to this conclusion.

The Riksbank said the extent to which Swedish banks rely on covered bonds in their liquidity reserves is unsatisfactory, noting that covered bonds compose almost two-thirds of major banks’ liquid securities denominated in Swedish kronor, while round 70% of the total collateral pledged to the Riksbank consists of covered bonds.

It said that if a large proportion of these bonds are owned by a small number of banks, there is a risk that the bonds will be difficult to sell in a crisis, and that this “cross-ownership” of covered bonds also gives rise to spillover effects within the banking system if banks need to sell others’ covered bonds to secure liquidity.

It added that access to wholesale funding at low interest rates, including covered bonds, has also contributed to a considerable increase in Swedish householders’ indebtedness in the last 10 years.

The Riksbank proposed that the amended terms and conditions would be introduced in stages in 2016, with the timeframe to be announced at a later date.