Amended Rules on securities eligible as collateral for Central Bank facilities
The Central Bank has issued rules amending the Rules on Central Bank of Iceland Facilities for Financial Undertakings, no. 553/2009, with the aim, among other things, of expanding the range of assets that financial institutions may provide as collateral for Central Bank facilities. In the main, this entails amending Article 11 of Rules no. 553/2009, on financial collateral arrangements in connection with Central Bank facilities, to include covered bonds as eligible collateral.
Covered bonds will therefore be eligible as collateral for Central Bank facilities upon satisfaction of specified conditions. Covered bonds are asset-backed securities that in this instance are secured by individuals’ króna-denominated mortgages. Issuance of covered bonds in Iceland is subject to Act no. 11/2008 and Rules set by the Financial Supervisory Authority. The Act contains provisions on monitoring of covered bonds and on maintenance of the value of underlying assets.
The Central Bank requires that the bonds be subject to market making and that at least 5 b.kr. market value have been sold from outstanding bond series. It should be noted that Nordic central banks and others accept covered bonds as collateral for facilities.
The Central Bank of Iceland has not granted loans to its counterparties in regular market transactions in recent years. Nevertheless, the Bank considers it necessary to make known what types of collateral it deems eligible if such lending should resume. In the past decade, securities eligible as collateral for Central Bank facilities have primarily included term deposits and securities issued or guaranteed by the Treasury. Treasury issuance has contracted in recent years, and large series such as Housing Financing Fund bonds are held mainly by investment funds. The three large commercial banks have issued covered bonds in the past several years, and the outstanding stock in the market is currently valued at about 400 b.kr.
According to another amendment to the Rules, equity contribution pledges and contributed capital are no longer eligible as collateral for Central Bank facilities.
27 May 2019