The Danish government’s plan to extend maturities on one-year mortgage bonds if refinancing auctions fail will prevent a potential scenario resembling a run on banks, central bank Governor Lars Rohde said.
The proposal presents “a credible resolution model,” the governor said in the central bank’s biannual financial stability report published today in Copenhagen.
The government last month presented its latest draft proposal that will extend maturities on one-year bonds by 12 months at a time if refinancing auctions fail or if rates rise more than 5 percentage points between auctions. The government plans to extend the feature to other short-term covered bonds to protect an economy that’s dwarfed by the nation’s $530 billion mortgage market.
“The immense popularity of mortgage-credit loans that have not been pre-financed has led to a potential refinancing risk for the mortgage banks,” Rohde said. “Mortgage banks have a continuous need for refinancing in the market, and they might experience a situation resembling a ’run’ on a bank. It’s very unlikely that this will happen, but the consequences could be enormous.”
The central bank also said the country’s banks are generally resilient to “severe macroeconomic shocks” after they have built their capital levels since 2008.
“It’s important that the banks maintain sound excess capital adequacy,” the central bank said.
The central bank’s stress test showed that the country’s biggest banks, which include Danske Bank A/S, Jyske Bank A/S, Sydbank A/S and Nordea Bank AB’s Danish unit, comply with capital requirements for systemically important financial institutions in all scenarios and that their Common Equity Tier 1 capital remains above 8 percent.
In a separate report, the central bank raised its gross domestic product forecast for this year to 0.4 percent growth compared with 0.3 percent in a Sept. 18 forecast. The bank lowered its 2014 GDP growth forecast to 1.5 percent from 1.6 percent and reduced its 2015 estimate to 1.6 percent from 1.7 percent.
The deficit will be 0.4 percent of GDP this year, improving from a previous forecast of 1.5 percent, helped by higher-than-expected government revenue. The gap will be 1.6 percent next year, also a reduction from the central bank’s previous estimate of 2 percent, according to the report.
Danish house prices are rising and “should be monitored closely to ensure that the expected upswing is sustainable and that imbalances do not build up in the economy,” Rohde said.