Norges Bank Backs Government Proposal for Covered Bond Curb

Norway’s central bank said it backs a government proposal to limit covered bond issuance used in mortgage financing to boost financial stability.

The Finance Ministry in December asked Norges Bank to submit its view on a proposal to curb covered bond issuance as a means to damp a run-away housing market and record private debt levels. Norway’s covered bond market has grown to 830 billion kroner ($144 billion) since legislation was introduced in 2007.

“Norges Bank endorses the Financial Supervisory Authority and Finance Ministry’s view that rules to limit the use of covered bonds as a means of financing mortgages should be considered,” Central Bank Governor Oeystein Olsen said in a letter dated Feb. 28 and published on the bank’s website.

The bank said it won’t give lending access to mortgage companies after the ministry had asked the bank to look into whether credit units that issue covered bonds should have restricted bank concessions limiting them to mortgage lending.

Near record-low interest rates in the world’s fourth-richest nation per capita, falling unemployment and wage growth have pushed private debt levels to an all-time high. Western Europe’s largest petroleum exporter has withstood the euro area’s debt crisis thanks to its oil wealth, helping real home prices surge almost 30 percent since 2008. Property values, adjusted for inflation, have almost doubled in the past decade.

The ministry in December asked the country’s financial regulator to assess a “qualitative” rule on loan transfers by banks to mortgage units, according to letters released that month. The request to craft new rules came after the watchdog last year said that the use of mortgages as bond collateral means fewer high-quality assets are left on balance sheets, while the low funding costs of covered bonds risk drawing financing from other areas.

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