A new Act allows Swedish mortgage lending institutions to issue covered bonds, providing them the same financing means as their EU counterparts. The Swedish parliament passed the Covered Bonds Act in late December 2003.
The Covered Bonds Act
The Swedish Financial Supervisory Authority (Finansinspektionen) may grant licences to Swedish banks or credit institutions to allow them to issue covered bonds. The bonds must be secured by either mortgage loans separated in a specific security pool or loans to certain states or local municipalities that are considered financially reliable borrowers. In both cases the issuer may add additional collateral of a certain type to the security pool, not exceeding 20% of the pool. The nominal value of the security pool must always be greater than the nominal value of the issued covered bond.
The Covered Bonds Act imposes certain restrictions on the issuer with respect to the mortgage loans in the security pool. For instance, the ratio between the nominal value of the loan and the market value of the underlying mortgaged asset may not be more than 75% for residential loans and 60% for commercial property loans. In other words, a security surplus is legally required. Furthermore, the underlying loans can only be secured by assets within the European Economic Area (EEA).
Furthermore, the enactment of the Covered Bonds Act has caused amendments to the Swedish Rights of Priority Act allowing the bondholder, in the event of the issuer's bankruptcy, to have priority rights over the assets in the security pool.
The purpose of the Act
According to the government Bill to the Covered Bonds Act, the use of covered bonds is a standard instrument for mortgage lending institutions throughout the EU. Subsequently, the new Act is intended to enhance the competitiveness of Swedish mortgage lending institutions within the EU by allowing them the same financing means as their EU counterparts. In addition, according to the Bill, the Covered Bonds Act is expected to cut the institution's financing overheads and in the long run benefit Swedish consumers.
The Covered Bonds Act will enter into force on July 1 2004.