This separate company is then financed through issuing bonds on the market. The special purpose vehicle has a clearly defined risk scenario and does not pursue any business activities other than acting as holder of the specified loans. Consequently, the company is not subject to the capital adequacy regulations that apply for mortgage institutions. Securitisation has several advantages, the main one being that it enables mortgage institutions to reduce their share of equity and thereby their total financing cost, since equity is a more expensive source of financing than loan financing. Furthermore, mortgage institutions can streamline their operations by selling claims and by specialising in issuing loans. Securitisation can also increase the stability of the financial system as credit risks can be transferred from institutions subject to regulation to players that are less sensitive to heavy credit losses. Securitisation using a special purpose vehicle located in Sweden is permitted, but in practice it is unprofitable since, under the current regulations, the special purpose vehicle will be subject to the same capital adequacy regulations as the mortgage institutions. A proposal to improve the conditions for securitisation in Sweden is currently being prepared by the Ministry of Finance. The Budget Bill for 2001 states that the government intends to put forward a bill on improved conditions for securitisation during autumn 2000. To date, three Swedish mortgage institutions, SBAB, SEB-Bolån and Bokredit have undertaken securitisation via special purpose vehicles abroad.
However, the Riksbank is critical towards the proposal on account of the doubtful role that the national supervisory authority would assume by taking responsibility for ensuing that the total collateral for the loan is intact. The supervision of Finansinspektionen may create the impression that the government is assuming special responsibility for the security of the bonds, and this is not the intention. Special legislation on gilt-edged bonds is likely to entail a return to tighter market regulation as mortgage institutions would be granted a special status on the capital market. What economic reason motivates to show favour to a certain group of borrowers? It is not obvious that gilt-edged bonds would contribute to reducing the mortgage institutions’ total financing costs. Gilt-edged bonds can only be issued against security up to a certain limit of the collateral value. It is likely that the remaining stock of non-secured loans will become more expensive to finance. The use of gilt-edged bonds may lead to lower financing costs for the issuing mortgage institutions if these institutions do not have to bear the cost of the special supervision that gilt-edged bonds require. In my opinion, the increasing competition will promote new forms of funding that make more efficient use of equity. Securitisation One financing form that permits the efficient use of equity is securitisation. Securitisation involves a given loan stock with accompanying collateral being taken off the balance sheet of the mortgage institution and sold to a separate company specially created for this purpose (known as a special purpose vehicle).