The share of covered bonds that can be posted as collateral from institutions with close links has been raised from 25% to 75%, with immediate effect.
“What we have done is to make sure that the collateral that Swedish banks can use in the intraday borrowing system is increased,” Mattias Persson, head of the financial stability department at Riksbank, told The Cover. “This way they have a wider range of collateral they can post in intraday credit.”
“This is something we have been thinking about for a long time. We think that this collateral is of high quality, and governed by special regulations, so we decided to increase the amount of such collateral that can be posted.”
Last Thursday, the Swedish National Debt Office announced that it would carry out further Swedish treasury bill auctions in an attempt to address the shortage in the treasury bill market that resulted from last week’s market turmoil. The first auction of Skr25bn took place last Friday and the second auction will be held tomorrow (Tuesday). The total volume to be issued will amount to a maximum of Skr150bn. The cash generated from the auctions will primarily be placed in reverse covered mortgage bond repos, SNDO said.
“The move was not really aimed at the covered bond market,” said a Danske Bank analyst. “But they did it in a clever way because it added support to the mortgage bond market.”
After the SNDO’s announcement two year spreads came in 15bp, and five year spreads were 5bp tighter, he said.
In December 2007 Riksbank decided to allow, for the first time, a counterparty, or an institution with close links to the counterparty, to post covered bonds as collateral. However, it placed a 25% “concentration limit”, restricting the amount of a borrower’s collateral value that could be made up of covered bonds issued by the same borrower or by a group of related issuers.
According to Persson, the Danish and Norwegian central banks have never placed such a limit on the amount of covered bonds from institutions with issuing subsidiaries that can be used as collateral.