In this report, we make a detailed assessment of Swedish covered bonds amid rising concerns about the Swedish housing market. It is important to fully understand what has pushed house prices higher and what is behind the growing household debt in Sweden, in order to make a fair assessment of the situation. It is also crucial to comprehend how holders of Swedish covered bonds are shielded by - what we refer to as - the three lines of defence .
The health of the banking sector is important, as the banks are required to add collateral to the cover pools as long as they are solvent (all mortgage institutes are subsidiaries of banks except one institute, which is owned by the state, SBAB) - t he first line of defence .
Our experience is that many investors are not fully familiar with the Swedish covered bond legislation and the quality of the cover pools - the second line of defence .
Finally, the financial health of Swedish households (mortgage borrowers) could be debated given the relatively high debt-to-income ratio, but that measure has some flaws and stress tests conducted by the FSA give another idea about households' ability to pay interest rates on mortgages - the third line of defence .
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