Covered bonds have mortgages as collateral for their funding and according to the regulations governing the handling of these bonds, mortgages with an excessively high loan-to-value ratio may not be used as collateral. As the covered bonds are regarded as more secure by the market, the banks had the incentive to change over to this form of funding. Moreover,  3  See, for instance, Chistelis, Georgarakos and Haliassos (2013), Differences in portfolios across countries: economic environment versus households characteristics. The Review of Economics and Statistics, March 2013, 95 (1), pp. 220–236. 4  Another explanation for the banks’ extensive market funding is that the Swedish occupational pension system means that Swedish households themselves do not save with the banks, which means that the banks must find funding in the markets. The pension funds in their turn invest substantially abroad, which means that the banks must partly fund themselves abroad. BIS central bankers’ speeches  3  many banks in Europe had already introduced similar covered bonds. However, mortgage institutions were not allowed to fund the entire stock of mortgages with these bonds. To cover the remaining amount, the mortgage institutions instead began to borrow from their parent banks, which in turn to a great extent obtained funding on the financial markets. This meant that the link between the mortgage institutions, the banks and the financial markets were further reinforced, and this also increased the complexity of the funding of housing. During the 2000s, the banks’ market funding in foreign currencies also increased.
There are several factors that are usually highlighted as explanations for this structural problem: high costs for land and construction, the current legislation on planning, construction and the environment that makes strict demands regarding the type of housing that can be built, and rent regulations. I do not intend to go into this in depth now, but would like to note that structural measures are required in the housing market, which will contribute to an increase in housing and reduce the lock-in effect. However, such measures are beyond the mandate of the Riksbank. We should perhaps also reflect on the banks’ funding of mortgages, to create a better balance in funding sources and thus better stability. The banks’ issues of covered bonds to fund housing have been successful and led to good access to funding and lower funding costs, and ultimately to lower mortgage rates. But one should also be aware that as covered bonds have become so common, we have also built vulnerabilities into the banking system: the dependence on the market for covered bonds functioning properly and the risk that the banks’ balance sheets are too highly mortgaged limits the scope to take action in a crisis situation. An excessive share of encumbered assets risks putting the banks’ other investors BIS central bankers’ speeches  7  at a disadvantage, which can mean they become more volatile in times of financial stress.