Norway’s Ministry of Finance on Wednesday proposed legislation requiring 2% minimum overcollateralisation for covered bonds to allow them to benefit from EMIR exemptions, at the same time that the EBA is proposing that a similar CRR standard would not have to be statutory.

Norway has been moving towards introducing a 2% minimum overcollateralisation (OC) level since criteria laid down by the European Securities & Markets Authority (ESMA) required a “legal” collateralisation level of 102% in October 2014, with the standard needing to be enshrined in legislation or regulation and not contractually-based. Sweden’s FSA introduced such a regulation last year.

Some market participants have over time complained about both a lack of clarity in the nature of OC requirements and a lack of consistency across different pieces of EU legislation. When LCR rules were announced in October 2014, it was not immediately clear how OC criteria were to be interpreted.

Norway’s move now comes as the European Banking Authority (EBA) has proposed a higher OC requirement, 5%, for covered bonds to be eligible for preferential risk weight treatment under the Capital Requirement Regulation (CRR), but one that does not have to be enshrined in legislation. In its recommendations to the European Commission, published in December, the regulator said:

“The EBA considers that, while all covered bonds should comply with the general coverage requirement, only those complying with the minimum effective level of overcollateralisation should be eligible for preferential risk weight treatment (irrespective of whether or not the overcollateralisation requirement is anchored in the national legal/regulatory framework).” (The CBR emphasis.)

An EBA official has said that a Directive based on recommendations in “Step I” of its recommendations should form “a sort of single point of entry” for prudential regulations. However, the EBA’s minimum OC requirement would not be included in such a Directive, being part of “Step II” recommendations that are only necessary for CRR treatment.

Moody’s meanwhile today (Monday) described the Norwegian government’s move as credit positive and said it will allow issuers to continue to use interest rate and currency swaps to manage fixed and floating rate exposures and cross-currency risks between cover pools and covered bonds.

“Swaps are particularly important for Norwegian issuers since the mortgages in the cover pools are floating rate and denominated in Norwegian kroner, but issuers rely to a significant degree on an investor base that prefers fixed-rate euro-denominated investments,” said the rating agency.

It noted that actual OC levels in the Norwegian covered bonds it rates exceed 2% on a nominal basis.