Norges Bank requires that banks pledge collateral for loans. The pledging of securities as collateral for loans from Norges Bank is regulated by Section 9 of Regulation No. 240 of 25 February 2009 on the Access of Banks to Borrowing and Deposit Facilities in Norges Bank, etc. Pursuant to Section 9, third paragraph, Norges Bank may lay down additional rules on the valuation of and haircuts for pledged assets. The current guidelines are published in Norges Bank Circular 1/2012.

The guidelines are intended to limit Norges Bank's exposure to risk, while providing banks with sufficient access to borrowing from the Bank. Risk exposure is limited by accepting only high quality securities as eligible collateral and by applying a haircut to pledged securities when determining loan values.

Norges Bank is now proposing new guidelines that are more straightforward and better structured. Practical information and routines relating to pledging securities are removed from the guidelines. Information of this type will be available on Norges Bank's website. The paragraphs will be numbered to facilitate referencing and the changes will facilitate users' understanding of the rules.

In addition to the simplifications, some minor changes to the guidelines are made.

The changes shall apply from 11 January 2016.

Changes to the guidelines

Under the current guidelines, a bank may not pledge more than 20 percent of the volume outstanding of an asset-backed security and securities denominated in a foreign currency issued by a private entity. This requirement reduces the risk of a pronounced price impact if Norges Bank has to sell all, or substantial portions, of the volume outstanding of a security in the event of realisation. Norges Bank proposes applying this restriction to all types of securities and fund units, with the exception of Norwegian government securities.

Under the present guidelines, securities or issuers must have a satisfactory credit rating from one of the three major credit rating agencies. In practice, this means that the best credit rating is applied. The credit rating requirement is especially important for reducing the risk associated with foreign securities. The experience of recent years' market turbulence shows that it can take time before downgrades are implemented by all the agencies. To incorporate the downgrades earlier, Norges Bank proposes to apply the second best credit rating in the new guidelines, if a security or issuer has more than one rating.

The valuation of pledged foreign currency securities is currently subject to an additional haircut. In recent years, currency fluctuations have been wider than provided for by the haircut rules. The haircut for foreign currency securities is increased by 1 percentage point to 6 percent.

By virtue of the correspondent bank agreements between the Scandinavian central banks, Norges Bank has approved securities pledged in Euroclear Sweden and VP Securities (Denmark) as collateral. This arrangement has been little used over the past two years and the agreements are in the process of being terminated. The guidelines will be changed accordingly.

Banks have currently pledged securities worth approximately NOK 250 billion. The proposed changes will have a limited impact on banks' borrowing access.

Please submit comments on the proposal by 15 October 2015.

Kind regards,

Kristin Gulbrandsen, Director

Olav A. Bø, Director