Background

Pursuant to Section 9 of the "Regulation on banks’ access to loans and deposits in Norges Bank etc.”, Norges Bank sets detailed conditions for pledging securities and fund units as collateral for loans from Norges Bank. The current guidelines were issued in Norges Bank Circular no. 6/2010.

The rules are intended to ensure that banks have adequate access to the borrowing facilities while limiting Norges Bank's exposure to risk. Risk exposure is limited by ensuring that only high quality securities are accepted and that access to loans is lower than the market value of pledged securities (haircut).

The experience of the financial crisis and ongoing turbulence in financial markets have shown that current haircut rates are too low. When Norges Bank amended the guidelines in 2010, consultative bodies were notified that haircut rates would be raised. Norges Bank is now circulating for comment a proposal for new haircut rates for securities and fund units pledged as collateral for loans from Norges Bank.

Banks have currently pledged securities worth approximately NOK 250 billion. The proposed higher haircut rates entail limited changes in banks' access to loans. 

Amendments to the guidelines 

Increased haircuts

Norges Bank is changing the haircut rates for securities and fund units pledged as collateral for loans from Norges Bank. The changes will apply as from 15 February 2012, at the same time as previously approved amendments enter into force.

The proposal entails an increase in haircuts that reflects the increased volatility in securities markets. Another change pertains to floating-rate securities, which will be subject to haircuts according to maturity. Under the current guidelines, haircuts for floating-rate securities are determined by the time remaining until the next rate adjustment, regardless of maturity. However, floating-rate securities may fall in value if market risk premiums rise. The fall in prices will be greater, the longer the maturity. Haircuts for top-rated government securities will continue to be based on the time remaining to the next rate adjustment.

 In addition to the general increase in the haircut rates, Norges Bank proposes:

• A 15 per cent haircut will apply to asset-backed securities (ABS) regardless of maturity.
• The additional haircut on securities denominated in currencies other than Norwegian kroner will be raised from 3 to 5 percentage points.
• An additional haircut of 5 percentage points will apply to bonds issued by mortgage companies belonging to the same corporate group as the borrower or that are considered related to the borrower under the Norwegian Accounting Act.
• The additional haircut on foreign securities for which price data are unavailable from Norges Bank's market price provider will be raised from 2, 4 and 6 percentage points, to 15, 20 and 30 percentage points, respectively, depending on credit rating.

The proposed new haircut rates are presented in Table 1.[1]

Table 1: Haircut rates. Per cent.

Category 1:

• Government securities with a credit rating of AAA (or equivalent rating for notes and short-term paper)

Category 2:

• Government securities with a credit rating of AA+ down to and including A (or equivalent rating for notes and short-term paper)
• Covered bonds with a credit rating of AAA down to and including AA-
• Bonds, notes and short-term paper issued by Norwegian and foreign local government authorities
• Bonds, notes and short-term paper with risk weight 0 under the capital adequacy rules
• Bonds, notes and short-term paper guaranteed by government authorities

Category 3:

• Bonds, notes and short-term paper with private foreign issuers
• Covered bonds with a credit rating A+ down to and including A
• Bonds, notes and short-term paper issued by private Norwegian issuers with a credit rating of AAA down to and including A
• Units in money market and bond funds [2]

Category 4:

• Covered bonds from Norwegian issuers without credit rating or with a credit rating A- or lower
• Bonds, notes and short-term paper issued by private Norwegian issuers with a credit rating of A- down to and including BBB- 

Effects of higher haircut rates on banks' access to loans from Norges Bank

The proposed haircut rates entail an increase in the value-weighted haircut from 4 to 9 per cent. Changes in haircuts for ABS and covered bonds and the higher foreign currency haircut are the primary contributors to the increase. This analysis is based on current pledges, and does not take into account that the banks may adapt to new haircut rates before they enter into force. 

Amendments to “Regulation on the access of banks to borrowing and deposit facilities in Norges Bank etc.”

The guidelines for pledging securities and fund units as collateral for loans from Norges Bank are authorised by Section 9 of the “Regulation on banks’ access to loans and deposits in Norges Bank etc.” (Lending Regulation). Norges Bank proposes adding a provision to Section 9 of the Lending Regulation that clarifies Norges Bank’s authority to change collateral requirements for loans that have not yet matured.

We request comments on the amendments by 2 December 2011.

Sincerely,

Kristin Gulbrandsen

Sindre Weme

 Footnotes

1) Credit rating in the table refers to Standard & Poor’s. Norges Bank also approves credit ratings from Fitch and Moody’s.

2) In the case of funds, duration will be used to determine the haircut rather than time remaining until the next rate adjustment.