Bloomberg News

Denmark Tells Banks to Ignore Basel on Mortgage Bonds

December 06, 2012

Denmark’s financial regulator is telling banks to ignore global standards set by the Basel Committee on Banking Supervision and give mortgage bonds the top liquidity designation reserved for sovereign assets.

The Financial Supervisory Authority is disregarding Basel’s definition of easy-to-sell assets even as it requires banks to show they comply with liquidity coverage standards envisaged by the regulator. The Copenhagen-based watchdog will expand the pool of reporting banks “in the near future” from Denmark’s five largest lenders to include institutions with working capital that exceeds 12 billion kroner ($2 billion).

“We think, based on objective criteria, that a large part of Danish covered bonds are as liquid as government bonds,” Kristian Vie Madsen, deputy director at the Copenhagen-based agency, said in an interview.

The FSA has backed Denmark’s banks in lobbying the European Commission for equal treatment of mortgage bonds after the Basel Committee proposed limiting the asset class to 40 percent of easy-to-sell holdings. Regulators want lenders to hold more liquid assets to help them withstand market disruptions.

Denmark has fought Basel’s definition of liquid assets as Europe’s debt crisis tests assumptions that sovereign bonds are safer than other securities. The government in Copenhagen, the central bank and commercial lenders have argued that Basel’s liquidity rules would lay the Danish market to waste. Denmark’s public debt is less than a third the size of its $495 billion mortgage market, meaning there aren’t enough sovereign bonds to satisfy banks’ liquidity needs.

Liquidity Tests

The European Banking Authority is now devising a set of criteria to determine whether an asset satisfies its liquidity tests. The outcome of the EBA’s evaluation will determine how Basel’s standards are applied in Europe.

The FSA’s stance is “very positive for Danish covered bonds” and gives the banking industry some respite from having to compete for Danish government bonds, Jens Peter Soerensen, chief bond analyst at Danske Bank A/S (DANSKE) in Copenhagen, said today.

“This is the first time that I see the FSA show such strong support,” Soerensen said. “They’ve been pro the banks on this issue and have worked with them, but I haven’t seen them so outspoken.”

“Banks won’t be forced to buy Danish government bonds in the front end as much as we had expected,” he said. “It gives us more flexibility.”

‘How Prepared’

The EBA will conduct a “deep” study of Basel liquidity rules, Michel Barnier, the EU’s financial services chief, said today in a speech in Brussels. The EU said Dec. 3 it was joining the U.S. in missing a Jan. 1 deadline to begin phasing in requirements.

What constitutes a liquid asset “is still undecided and will be so until 2014, we expect,” Madsen said. The FSA is assuming the outcome will fall in Denmark’s favor, he said.

The regulator wants banks to report their liquidity ratios “mainly to see how prepared they are and if they face a challenge,” Madsen said. “Is it a big challenge, is it a small challenge, for the banks to come up with the liquidity?”

Benchmark Danish mortgage bonds are, on average, as liquid as the nation’s AAA rated government bonds, even in periods of market stress, the central bank said in a Nov. 22 working paper. The study confirmed a 2010 finding. The bonds may become more popular as issuers grow more profitable.

Nykredit Win

Nykredit A/S, Denmark’s largest mortgage lender and Europe’s biggest issuer of covered bonds backed by home loans, won court approval today to raise margins on loans, ending at least three years of legal wrangling. Danish competition authorities had capped increases, citing the lender’s market dominance after its 2003 acquisition of Totalkredit A/S.

Demand for Denmark’s mortgage bonds has soared since the global financial crisis erupted, and gained momentum as Europe’s sovereign debt turmoil drove investors out of euro-denominated assets. Even the nation’s burst housing bubble, which has sent property prices down about 25 since a 2007 peak, hasn’t curbed interest. The number of foreclosures rose 8 percent in November to 455, the statistics office said today.

Yet the Nykredit index of Denmark’s most traded mortgage bonds continues to set new records, and reached its highest level this week since its creation in 1993.

Good Liquidity

Denmark’s largest banks enjoy “good” liquidity as capital markets start to function again, the central bank said in an October report. Most small and medium-sized lenders are also in a better state following an influx of deposits and cuts in lending, the bank said, citing the results of its stress tests.

Lenders still have to “adapt to the coming pan-European liquidity regulation,” Copenhagen-based Nationalbanken said.

Denmark requires lenders to hold enough liquid assets to cover at least 10 percent of their total debt and guarantees, or 15 percent of their short-term debt exposures. From the end of this year, the FSA is also telling banks to have excess liquidity of 50 percent after meeting the legal requirement, or risk possible sanctions.

The Danish FSA has required the country’s five largest lenders, including Danske Bank, Nykredit and Nordea Bank AB, to report their liquidity coverage ratios and net stable funding ratios since September 2011, Madsen said.

The practice will continue even as prospects fade for the new global rules for liquidity and capital to be phased in at the beginning of next year, he said.

Accord Needed

The European Union will join the U.S. in missing a Jan. 1 deadline to implement the Basel recommendations amid disagreements over banker bonuses, leverage limits and liquidity ratios. Michel Barnier, the European Union’s financial services chief, said Dec. 4 an accord may be reached next week so the law can take effect “as soon as possible” next year.

“It would be good for Europe if we had an agreement and the rules could come into force,” Madsen said. “We have been discussing this a long time, and it would be good to have it finalized.”

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net Christian Wienberg at cwienberg@bloomberg.net


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