Bloomberg News

Denmark Steps Up Mortgage Asset Defense Amid Liquidity Curbs

November 18, 2011

Nov. 17 (Bloomberg) -- Denmark’s $495 billion mortgage-bond industry is lobbying the European Union to soften its stance on liquidity requirements for banks and says concessions to date are inadequate.

The Association of Danish Mortgage Banks wants the European Commission to let issuers use as much as 10 percent of their own mortgage-backed covered bonds to fulfill liquidity rules, said Peter Jayaswal, deputy director at the Copenhagen-based group. The commission’s current proposal, which prevents banks from counting their own mortgage bonds as liquid assets, will “damage” Denmark’s system of allowing home owners to prepay their debt, he said.

“You can put up criteria to prevent the money machine threat that Basel is worried about without damaging the prepayment system in Denmark,” Jayaswal said in an interview.

The Nordic country, whose mortgage bond market hasn’t registered a single default since its creation in 1795, is stepping up its battle with European regulators after winning some concessions over the Basel Committee for Banking Supervision. Denmark says existing proposals punish mortgage assets, tainted since the U.S. subprime mortgage crisis, even though Danish home loan-backed bonds are better rated than more than half the sovereigns in the euro area.

“Covered bonds are traded on the market all the time, so how can it be that they’re liquid when they’re owned by a pension fund whereas if they’re owned by a bank, they’re not liquid,” Jayaswal said. “That’s not how it works.”

Prepayment Option

Denmark’s mortgage-bond market allows borrowers the option of repurchasing their loans, for example to take advantage of lower interest rates. When a homeowner exercises the call option, the mortgage bank needs to repurchase the old bond from the investor.

At the same time, the mortgage issuer needs to provide a new loan to the borrower refinancing the mortgage. The bonds backing the old loan sit on the issuer’s books until the new bonds have been sold to investors. The prepayment service that issuers provide would be jeopardized by the commission’s proposal, Jayaswal said.

“There should be no difference if it’s an issuer-held bond or not,” he said. “The investor still has access to the collateral and no one can lay claim to that.”

After lobbying from Denmark, the commission agreed in July to ease Basel’s liquidity rules and allow banks to hold unlimited amounts of mortgage bonds issued by other lenders if tests showed the securities satisfied liquidity requirements. The measure, which puts mortgage bonds on equal footing with sovereign debt, still needs final approval. Basel had sought a 40 percent cap on using mortgage-backed covered bonds as liquid assets.

‘A Strange Thing’

The commission is unlikely to accommodate Denmark’s request to allow lenders to hold their own mortgage bonds, said Peter Engberg Jensen, the chief executive officer at Copenhagen-based Nykredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds.

Denmark may need to accept that mortgage assets will get a rougher treatment as global regulators respond to the fallout of the global financial crisis that started with U.S. subprime mortgages in 2007. The European Banking Authority last month forced banks holding mortgage securities to raise the risk weightings on the assets, forcing lenders to raise their capital. Nykredit’s capital requirement was tripled as a consequence, Jensen said.

“It is a strange thing, because it’s not a question of risk,” he said. “It’s a question of sudden rules being set up because of the crisis in Greece.”

--Editors: Tasneem Brogger, Jonas Bergman.

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

To contact the editor responsible for this story: Tasneem Brogger at or Angela Cullen at

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