In 2015,
the European Commission proposed to establish a Capital Markets Union. The aim
was to create a capital market that would be as competitive and efficient as
competing capital markets, for example that of the United States.
The CMU project was set in motion with several subprojects. One of these is the harmonisation of covered bonds within the EU. At the moment, the covered bond markets are mainly regulated at a national level, which varies between countries. Covered bonds have long-standing traditions that have steered market development. In some EU countries, covered bonds have in fact funded housing finance for over two centuries.
We welcome the Commission’s aims to harmonise covered bonds. After all, the purpose is to improve investor protection, increase cross-border investments and create markets in countries where covered bonds are currently not issued. The Commission has also highlighted that its intention is not to disturb the current well-functioning markets.
Covered bonds are a European product that are mainly used to fund mortgage loans. They are a particularly important product especially for Nordic banks. In fact, the markets in Finland, Sweden and Norway make up 15% of the global market and 16% of the European market.
Covered bonds also served as an affordable and secure form of funding during the financial crisis, allowing banks’ lending to continue undisturbed even during recession. It is therefore of utmost importance that the current well-performing markets are not disturbed and that the issuers are not caused extra costs.
The proportion of covered bonds to Finnish housing loans is about 36%. Thanks to cost-efficient funding, Finns enjoy affordable housing loans and pay the lowest housing loan interest rates in the euro area.
In Finland, Sweden and Norway, covered bonds are also issued by small banks. Small market participants might only conduct a few issues and thus cannot benefit from scaling advantages, so it is vital that costs remain moderate for them. In these markets especially, the cost-efficiency therefore gains particular emphasis.
We support the harmonisation objectives in EU regulation and want to trust that they are made to improve and deepen the efficiency of the capital markets, not debilitate it. We are, however, concerned about the potential rise in costs and how that may affect housing finance. In addition, we note that harmonisation may require Finnish issuers to make adjustments to current products despite investors and credit rating agencies seeing nothing wrong with the current model. Quite the contrary: the credit rating for all Finnish issues is AAA, the highest possible.
The Nordic position paper is available here.