Nordea Chairman Lashes Out at Plans to Stem Covered Bond Sales

Nordea Bank AB Chairman Bjoern Wahlroos criticized plans in Norway to stem covered bond issuance, arguing regulatory intervention will drag the market into what he characterized as a quagmire.

“It’s very dangerous to start tampering with things like covered bond issuance,” Wahlroos, who heads the board of Scandinavia’s largest bank, said in an interview in Stockholm. “Once you start doing that, it’s basically a morass.”

Norway is working on drafting legislation designed to prevent a property bubble after house prices doubled since 2002 and private debt burdens swelled to a record. Lawmakers are considering proposals that include tripling risk weights assigned to mortgage assets and stemming issuer reliance on covered bonds. The financial regulator has thrown its support behind both recommendations.

“Once you’re off the basic idea that you set up a system, which has a couple of key parameters of which capital, of course, is the most obvious, and start to micro-regulate, it’s always a bad idea,” Wahlroos said.

A number of banks, including Nordea, raised mortgage rates last week amid anticipation that stricter rules are unavoidable, adding to capital requirements.

Since its creation just six years ago, Norway’s covered bond market has grown to about 804 billion kroner ($140 billion). That’s left a smaller cover pool of collateral behind to absorb losses for senior creditors, should an issuer fail. Banks’ growing reliance on covered bonds also means they risk cutting themselves off from other funding sources, leaving them less diversified, Norway’s regulator and government have warned.

‘Structural Intervention’

Wahlroos argues that trying to curtail issuance of bonds financing home loans adds an unnecessary layer to existing plans to raise capital requirements.

“I can’t see how trying to curb mortgages by what is in essence a structural intervention makes sense,” Wahlroos said. “I’m not sure there is a housing bubble in Norway, I’m pretty sure the market can handle it and I’m pretty sure with cyclical buffers and other elements of the capital requirement mechanisms, authorities should have sufficient parameters to make it a bit more expensive to take out a mortgage.”

Nordea already sees a 3 billion-euro ($3.9 billion) impact on its risk-weighted assets stemming from Norway’s proposal to assign higher loss probabilities to mortgage loans, according to a presentation published this month.

1990s Crisis

The Finance Ministry in December proposed raising risk weights to 35 percent, more than double the recommendation in neighboring Sweden. Home prices in Western Europe’s biggest oil exporter rose an annual 8.5 percent last month, according to the Norwegian Association of Real Estate Agents. Household debt will grow to more than 200 percent of disposable incomes this year, the central bank estimates. In the years leading up to Norway’s 1990s property bubble, the debt ratio reached about 150 percent.

Finance Minister Sigbjoern Johnsen said at a seminar in Oslo last month that the government will do everything in its power to prevent another banking crisis. Johnsen, who was also finance minister during the 1990s crisis, has warned Norwegian households not to assume rates will stay low.

Still, Rune Bjerke, chief executive officer of DNB ASA, Norway’s largest bank, said last month he’s confident the government won’t do anything to harm the covered bond market.

Banks and corporates “really need a well-diversified and liquid bond market,” he said.

“If you need to change the rules when you’re in the game, then something is wrong,” Wahlroos said. “Our experience from the past is that stable and wise rules that are in force for an extended period of time are by far the best thing for any market, financial markets definitely included.”

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