Bloomberg News

Denmark Will Fight Haircut on Covered Debt That Basel Seeks

October 06, 2011

(Updates with foreclosure data, analyst comment in 25th paragraph.)

Oct. 6 (Bloomberg) -- Denmark isn’t satisfied with European concessions that seek to protect its mortgage bonds from international liquidity rules and will fight to ensure the securities get the same status as sovereign notes.

A proposal put forward in July by the European Commission that allows a more lenient treatment of Denmark’s mortgage- backed covered bonds than the Basel Committee for Banking Supervision had envisaged doesn’t go far enough, the country’s three main bankers groups said.

“We want the same treatment as government bonds for covered bonds,” Morten Frederiksen, a director at the Copenhagen-based Danish Bankers Association, said in an interview. “The liquidity of Danish covered bonds is so high -- and even higher than some government bonds.”

Denmark has been the most outspoken critic of Basel’s December proposal to treat mortgage bonds as inherently less liquid than government debt. The Nordic country, where the $450 billion in outstanding mortgage debt is more than three times the size of the government bond market, has since persuaded the European Union to rethink Basel’s rules before they’re implemented locally.

While the EU may base liquidity assessments on tests instead of being guided by an asset’s class, the concessions don’t go far enough, according to Denmark’s bankers’ groups. The bonds may still face a haircut, and lenders won’t be allowed to hold securities they issue themselves as liquid assets.

Extra Costs

Failure to treat mortgage bonds as liquid assets on a par with government debt will force losses on Denmark’s mortgage market and may send tremors through the whole economy, said Ane Arnth Jensen, director at the Association of Danish Mortgage Banks.

“It’s clear this will burden the Danish mortgage bond market with extra costs,” Jensen said in an interview.

Denmark has struggled against opposition from the U.K., which advocates a stricter application of the Basel regulations, according to the country’s bankers groups. The Nordic country has aligned itself with Germany, France, Sweden and Poland to build support.

“Denmark alone against the U.K. would be very problematic,” Karsten Beltoft, head of the Danish Mortgage Bankers’ Federation, said in an interview. “But we’re in the same boat as Germany, and that’s making me more comfortable. They’ll also fight for covered bonds to be highly liquid.”

Basel Haircut

Basel’s original proposal had sought to limit banks holdings of non-government bonds to 40 percent, and required lenders to book the securities at 85 percent of their market value. The liquidity rules are due to come into force by 2015. The European Commission’s July proposal is now with the European Parliament.

“The most important thing for us now is to ensure that Danish mortgage bonds qualify for the tier one treatment and that the progress made is not reversed,” said Jesper Berg, senior vice president and head of ratings and regulatory affairs at Copenhagen-based Nykredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds. “Clearly, minimizing haircuts and being allowed to use own bonds would be nice. However, I see the other issues as being the priority.”

Political Process

It may take about a year before it’s clear whether the liquidity concessions to covered bonds proposed in July will be passed.

“The political process is the most important and we don’t yet know how the European Parliament will treat this,” said Jens Valdemar Krenchel, head of the Association of Danish Mortgage Banks’ office in Brussels. “We are hopeful that it can be concluded in 2012.”

There isn’t enough Danish government debt for banks in the country to make up the shortfall if they’re forced to limit their holdings of mortgage bonds, according to Jensen.

The value of outstanding mortgage bonds in August was 2.55 trillion kroner ($456 billion), almost four times the 733 billion kroner in government debt, the central bank estimates.

Danish covered bonds carry higher credit ratings than more than half the sovereigns inside the euro area. Trading in the short-term bonds rose during the 2008 financial crisis, both in the total value of bonds traded and in the median size of individual trades, according to a central bank study published last year.

Credit Ratings

“We have been able to issue covered bonds all the way through the crisis,” Frederiksen said. “We’re a bit better off than some other countries in Europe, where they’re totally dependent on the banks being able to issue senior debt.”

Analysis of bid-ask spreads, credit ratings and market size indicate the securities “comply with the highest standards of liquidity and quality,” the Brussels-based European Covered Bond Council said in a Sept. 1 report.

The Danish banking sector is struggling as the international funding market shuts out all but the largest lenders. The central bank last month to offer a record 400 billion kroner liquidity lifeline to help lenders unable to tap markets for funds.

Twin banking and housing crises have left Denmark Scandinavia’s worst performing economy. Foreclosures rose 7.5 percent in September from August, the statistics agency said today.

Foreclosures are at the highest level since July 2010, said Jes Asmussen, chief economist in Copenhagen at Svenska Handelsbanken AB. Particularly hard hit were owner-occupied homes, where foreclosures climbed 55 percent, he said.

“With the latest signs suggesting unemployment is beginning again to inch up, as well as a housing market that’s showing clear signs of crisis, it’s far from certain we’ll see foreclosure numbers begin to point down,” Asmussen said.

--Editors: Tasneem Brogger, Christian Wienberg.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at

To contact the editors responsible for this story: Tasneem Brogger at; Angela Cullen at

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