Denmark’s Economy Ministry said the European Banking Authority signaled it won’t recommend that covered bonds be granted the highest liquidity status, in a blow to the nation’s $530 billion mortgage bond market.
“This is incredibly bad news and a potential disaster,” Jesper Berg, head of regulatory affairs and senior vice president at Nykredit Realkredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds, said in an interview. “We can only hope that the European Commission will be alert to the seriousness of this issue.”
Though the EBA said in a report that covered bonds met the requirements to be considered highly liquid, a majority at the London-based authority will argue against giving the securities the top liquidity status, according to a status update by the Danish Economy Ministry dated Nov. 26 and published yesterday on the website of the Copenhagen-based parliament. The EBA’s recommendation will be sent to the EU commission, which will make the final decision.
Franca Congiu, a spokeswoman for the EBA, didn’t immediately respond to voicemails seeking comment. Chantal Hughes, spokeswoman for Michel Barnier, the EU’s financial services chief, didn’t have immediate comment.
Denmark’s government said it will seek to build allies inside the European Union to lobby against the EBA and ensure the authority’s recommendation isn’t adopted, Economy Minister Margrethe Vestager said today in an interview. The government will also seek a “professional” assessment of its mortgage bonds, she said.
“It is crucial that Danish mortgage bonds get the highest liquidity treatment,” Vestager said. “European rules must make allowances for national differences.” The entire Danish parliament, including its representatives in Brussels, are united in ensuring the nation’s mortgage bond market is preserved, she said.
“It would have huge consequences for the financial sector if covered bonds don’t qualify as highly liquid,” Louise Mogensen, deputy director at the Danish Bankers Association, said in an interview. “We believe this is one of the biggest issues in a very long time between Denmark and the European Union.”
Danish banks have relied on mortgage bonds, which have more than three times the outstanding volume of the nation’s government debt market, to build liquidity buffers. The mortgage industry argues that banks will be forced to dump their holdings of the bonds if the securities no longer qualify as highly liquid assets.
“We can only hope that the commission stops and looks at the facts and the potential consequences,” Berg said. “Danish banks will now have difficulty meeting the liquidity coverage ratio and borrowing costs for Danish households will rise.”
The EBA isn’t due to publish its recommendations until next month, with draft technical standards set to be finalized by March. The EU commission is scheduled to decide on the EBA’s recommendation in June.
Denmark’s opposition parties signaled they will support the government in defending the nation’s mortgage system. Mogensen at the Bankers’ Association said Denmark is still hoping the EU commission will base its decision on the report and not the EBA’s recommendation.
“Hopefully, the commission will be willing to discuss this matter with the Danish authorities and understand once again how important it is for the Danish financial system that the bonds be defined as highly liquid.”
The EBA’s decision not to recommend covered bonds get the highest liquidity status “is very surprising,”Brian Mikkelsen, Conservative party spokesman for the parliamentary committee overseeing bank regulation, said in an interview. “It is most likely an error due to ignorance.”