Mr Nyberg comments on how EMU may affect the Swedish housing loan market and its financing  Speech by Mr Lars Nyberg, Deputy Governor of the Sveriges Riksbank, at Föreningssparbanken in Warsaw on 14 October 1999. *  *  *  Thank you for giving me the opportunity to come here and give some points of view on how EMU may affect the Swedish housing loan market and its financing. This is undeniably an issue which we have every reason to take an interest in whether we take part in the monetary union or not. One of the ideas with EMU is to create a more efficient market for goods and services where competition is increasing and consumers obtain better products at lower prices. In the housing loan market, this should mean that borrowers expect a greater range of products, more suppliers and lower interest rates. How should the Swedish housing loan institutions handle this challenge? Competition for customers As we know, the national housing loan markets in Europe look rather different, which is illustrated by the following diagram (figure 1). In countries such as Germany, Denmark, Sweden, the Netherlands and the United Kingdom, the total outstanding stock of loans with mortgages in property totalled over 50% of GDP. In other countries, including Greece and Italy, the equivalent figure is under 10%. The differences depend on factors such as the systems of rules, tax legislation and market structure which vary from country to country.
Securitisation means that a given loan stock with the collateral pertaining to it is lifted out of the balance sheet in the housing loan institution and invested in a company separately created for the purpose (a so-called special purpose vehicle), which is then financed in the market by issuing bonds. This company has a clearly defined risk scenario and does not carry out any activity besides holding the specified loans. It need not therefore be subject to the capital adequacy rules that apply for housing loan institutions. Assume that the housing loan institution must set aside four million kronor of a loan stock of 100 million while the market accepts financing the securitised stock with a capital of 1 million kronor in the company created for the purpose. If the stock provides a return of SEK400,000 after financing and operating expenses, this gives a return on capital in the housing loan institution of 10% before tax. The same loan invested in the special company will provide a return on capital of 40% before tax. A buffer for investors can also be added on via credit guarantees, which further reduce the requirement of equity. A number of objections can be raised to this example, but it serves well to illustrate the driving mechanism behind a securitisation. In practice there are many difficulties.