Consultation: Changes to the guidelines for collateral for loans from Norges Bank
Norges Bank's letter of 3 February 2022 to Finance Norway.
The guidelines for collateral for loans regulate the requirements for securities and fund units pledged as collateral for loans from Norges Bank. The guidelines are issued pursuant to the Regulation of 18 December 2019 No. 2025 on access to lending and deposit facilities at Norges Bank (the “Lending Regulation”). Under Section 6, sixth paragraph, Norges Bank may lay down more specific rules for valuation and haircuts applied to pledged assets. The current guidelines have been published in Norges Bank Circular 4/2021.
The guidelines are intended to limit Norges Bank’s exposure to risk, while providing banks with sufficient access to the Bank’s lending facilities. Risk exposure is limited by accepting only high quality securities as eligible collateral and by applying a haircut to pledged securities when determining loan value amounts.
Norges Bank is now announcing some changes to the guidelines. A maximum limit per borrower is being introduced for the borrower’s total pledging of covered bonds. Furthermore, there will be an increase in the haircuts applied to securities with long maturities and in the additional haircuts applied to securities denominated in some foreign currencies. Norges Bank will also accept credit ratings from the credit ratings agency Scope. In addition, some minor changes and clarifications will be made in the guidelines.
A draft circular with new guidelines is attached.
The changes will enter into force on 31 August 2022.
Changes to the guidelines
When calculating the loan value, a haircut is applied to the market value of securities pledged as collateral based on the type of security, maturity, credit quality and whether the security has fixed or floating rate. The maturity haircut reflects the risk that the value of pledged securities may fall if risk premiums or market interest rates rise. This risk increases with the maturity of the security. Under the current guidelines, the same maturity haircut is applied to all securities with maturity above seven years. Securities with particularly long maturities are at a greater risk of a fall in market value than the current haircuts take into account. To limit this risk exposure, haircuts for securities with residual maturity above 15 years are being increased.
An additional 6 percentage point haircut is applied to pledged securities denominated in foreign currency. Greater volatility in some foreign exchange rates in recent years suggests that the current additional haircut does not sufficiently limit Norges Bank’s risk exposure. Norges Bank will therefore increase the additional haircut for securities denominated in USD, CHF and GDP from 6 to 7 percentage points. For securities denominated in JPY, NZD and AUD, the additional haircut is being increased from 6 to 8 percentage points.
Covered bonds represent the biggest share by far of securities pledged with Norges Bank. Over the past five years, such bonds have accounted for around 65 percent of banks’ total loan value. A number of banks have only pledged covered bonds as collateral for loans. A less diversified portfolio of pledged securities increases Norges Bank’s risk exposure. Banks’ cross-holdings of covered bonds may contribute to amplifying this concentration risk. Norges Bank is therefore setting an upper limit so that covered bonds may account for a maximum of 70 percent of the market value of the pledged securities after haircut. Nevertheless, banks will be permitted to pledge only covered bonds, but the loan value will be limited to 70 percent. This limit gives banks incentives to pledge more types of securities.
Norges Bank currently accepts credit ratings from Standard & Poor’s, Fitch and Moody’s. The share of securities rated by other agencies is increasing, and it has been banks’ longstanding desire for Norges Bank to accept ratings from additional agencies. Norges Bank is favourable to this. Approval of additional credit rating agencies may increase the pledging of rated securities and improve price competition between agencies. This may result in lower costs in the longer term, for Norges Bank, banks and issuers. Norges Bank will therefore accept credit ratings from the credit rating agency Scope. The choice of Scope is based on an assessment of coverage, price structure for data delivery and other contractual terms and conditions among a selection of credit rating agencies subject to the Credit Rating Agency (CRA) Regulation.
Covered bonds issued in NOK are currently exempted from the credit rating requirement. This exemption will be removed, so that the security (ISIN) must have an approved credit rating. Since for Norges Bank, a credit rating is important for ascertaining the risk associated with pledged securities, covered bonds should be subject to a credit rating requirement. Approval of the credit rating agency Scope will also give issuers of covered bonds in NOK increased opportunities for obtaining a credit rating.
Credit rating requirements for foreign treasury bills is being changed so that that the credit rating of the issuer can be accepted. It is further being proposed to exempt securities with a Norwegian government guarantee from a credit rating requirement so that securities with a Norwegian government guarantee are placed on a par with other securities with a public guarantee.
Norges Bank currently accepts units of funds that pursuant to their statutes are confined to investing on securities that are eligible under the current rules. In the new guidelines, Norges Bank is adding a clarification that the maximum average credit and interest rate duration pursuant to the fund’s statutes will be used to determine the haircut applied to fund units. If no such information exists pursuant to the fund’s statutes, the fund will receive highest haircut in the applicable category.
To make the guidelines easier to understand, a new table will provide an overall presentation of the requirements for securities accepted in the different haircut categories.
Banks have currently pledged securities with a total loan value of around NOK 400 billion. The announced changes will have minor consequences for the loan value of banks’ pledged collateral.
Please submit comments on the proposal by 17 March 2022.
Olav A. Bø
Ketil Johan Rakkestad