The EEA’s long-awaited passage of the EU Securitisation Regulation (SecReg) should finally open the door for Norway’s securitisation market (SCI 14 June). Indeed, the jurisdiction is expected to hit the ground running.
Marcus Nilssen, partner at BAHR, explains: “Banks here are exposed to higher capital requirements than elsewhere in Europe; for example, a 4.5% systemic risk buffer on Norwegian exposures. This is higher than most other European jurisdictions and means securitisation in some ways makes more sense for a Norwegian bank than other European banks without such exposures.”
He adds: “It has been a long wait where Norwegian banks have lacked an important capital management tool, which has put them at a disadvantage compared to their European peers. I think we will see a number of banks dig into this and see what opportunities await.”
Jonas Bäcklund, CEO of Revel Partners, adds: “The Norwegian banking market is relatively concentrated. We see no reason why the situation in Norway should not develop as it has done elsewhere in Europe and help to reduce systemic risks, allow for banks to better manage their capital position and in the end provide capacity for more lending tosupport the real economy.”
The Norwegian securitisation market has seen false dawns before. While the SecReg became effective in the EU in 2019,the EEA (which also includes Liechtenstein and Iceland) has struggled to adopt the regulation for its purposes, prevented in part by a substantial backlog of financial regulations and a perceived lack of political interest in facilitating securitisation. However, Nilssen believes that this may ultimately be to the benefit of Norway’s market.
He explains: “The EU securitisation market has grown at a slower pace than what the EU was hoping for when SecReg was passed, and the European regulators have consistently worked on improving the legal framework to facilitate growth. The EU’s Green Deal and its ambitions fora Capital Markets Union requires the establishment of a viable securitisation market in Europe, which should motivate further improvements.”
He continues: “The regulatory landscape for securitisation has therefore changed for the better, and it is now a more viable funding or credit risk management tool compared to in 2019. Coming into2025, we’re looking at the implementation of both Basel 4 and the SecRegin Norway, and I believe this will present Norwegian banks with some interesting opportunities.”
While this will present “a learning curve”, the passage of an improved SecReg alongside improved Basel regulations means the jurisdiction could avoid teething problems seen in the EU: “In Europe, they have been building it stone by stone, and the Norwegian banks should benefit from these efforts once our securitisation market opens.”
Bäcklund agrees: “There’s more regulatory clarity now, in addition to more transactions that can be used as benchmarks. The starting point is better than it has been for most other European markets, with a more plug-and-play solution.”
The SecReg, of course, still requires the approval of the Norwegian parliament. Nilssen believes this is a foregone conclusion. Although it’s run by a minority government and left-wing parties have a strong presence, he says: “It’s a technical financial regulation which isn’t high on the political agenda. I think the debate has already been had before and, at the end of the day, this is an EU law we have to implement.”
If the law passes during the autumn of 2024,it is expected to be in force from 1 January 2025. Regulators, however, may still pose a challenge.
Nilssen says the Norwegian regulators haven’t publicly expressed a view on the regulation, but is hopeful the legal framework in its current form addresses the risks which the regulator was previously worried about. However, SRT will be scrutinised “particularly carefully” to make sure risk has effectively left bank balance sheets.
This could mean flowback risk, which was a source of anxiety for regulators elsewhere in the Nordic region, may also worry the Norwegian one (SCI 28 March).
Bäcklund describes this as consistent with “prudent banking”, saying: “In my view, it is reasonable to have concerns about flowback risk. When banks rely on these instruments for sourcing capital, they should have a clear and articulated view for how the bank intends to address this aspect in line with their overall risk appetite and governance. Originating banks are expected to be able to communicate their views on thesetopics comprehensively.”
SCI understands that some banks are already seriously looking at SRT deals in the region, meaning synthetics should come before cash deals. Larger banks with large Norwegian portfolios that already have their funding needs met by covered bonds should take the lead, and it is expected these will be Nordic giants rather than multinationals.
Bäcklund observes: “International banks operating in Norway already have the option to do SRTs referencing their Norwegian assets through the ECB channels. That’s not going to change, but levels the playing field by opening up the possibility also for FSA-regulated banks.”
He adds: “Banks are generally well-capitalised and have anticipated the implementation of SecReg. We don’t see a huge wave of transactions coming in January 2025, but we anticipate a gradual development of the Norwegian securitisation market similar to the trends observed elsewhere in Europe.”
The first synthetic deals should reference corporate loans. This is the norm in developing SRT markets, but Nilssen explains there will be some differences: “I would think corporate loans will be the first ones; for instance, to SMEs or corporate real estate, where the risk weight is sufficiently high to justify a transaction. The relatively high capital requirements associated with some of these asset classes could make SRT transactions even more appealing to Norwegian banks with large exposures to these sectors.”
Bäcklund also notes that Norway has a considerable shipping industry. He adds any such deal would likely be unable to achieve STS but also that a “non-STS transaction still does the job”.
Smaller and mid-size banks may find cash deals more interesting; in particular, those with large granular portfolios, like auto loans.
“Everyone expects formal approval this autumn, so I think it is about time for issuers, investors, sponsors and other market participants to start thinking about what Norwegian deals can look like. It takes some time to get from term sheet to closing date, especially for first-time issuers, so there’s no need to wait until the law is finally printed. Interested parties should get started on their homework,” Nilssen concludes.
Joe Quirugajose.quiroga@scinews.com
