Norway’s financial regulator proposed putting limits on covered bond financing, arguing that the increase in such funding fuels balance-sheet risks.
Norway’s covered bond market has grown to about 780 billion kroner ($137 billion) from less than 100 billion kroner in 2007 and makes up about 20 percent of the banks’ funding, the Financial Supervisory Authority said.
“What we fear is that extensive use of covered bonds could inherently increase the vulnerability of the financing structure of the banks over time,” Director General Morten Baltzersen said today in an interview. “At this stage after the rapid growth of the instrument we should consider possible limitations.”
Banks may have difficulty obtaining unsecured funding as investors shun higher-risk financing in favour of covered bonds, according to the regulator. The use of mortgage loans to secure the bonds also provides less high-quality assets to backstop the banks’ other types of financing. The low funding costs of covered bonds risk drawing away funding from other areas.
“There are reasons to be prudent as to the future use of these instruments,” Baltzersen said. “This is a concern that we share with most financial supervisory authorities in Europe.”
Any introduction of general restrictions would be designed not to “undermine” the established covered bond market, according to the FSA. The regulator said that consideration should be given to introducing limits on the proportion of assets that can be posted as collateral for covered bonds.
Overall, the banks are “solid and profitable,” the regulator said in a report, adding that the trend of rising house prices and household debt continues to be a cause for concern. The regulator also said it would seek to curb the increased use of covered bonds to finance mortgage lending, according to a report today.
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