Global bank regulators need to drop a plan to set minimum capital requirements for home loans, according to the man overseeing the world’s oldest and biggest market for mortgage-backed covered bonds.
Jesper Berg, director general of the Financial Supervisory Authority in Denmark, says the capital floors that the Basel Committee for Banking Supervision wants to enforce globally ignore major national differences in risk levels. In neighboring Sweden, the FSA also argues it’s wrong to try to standardize risk models across borders. The Stockholm-based regulator says it’s making that case to the Basel Committee now.
Basel needs to rethink its proposal in order to stop “capital requirements in Europe going through the sky,” Berg said in an interview.
“The floor would make the most sense in relation to the corporate book and the least sense in relation to mortgages,” he said. “The corporate book is where the competition across borders is and so that is where you need to have a level playing field.”
Basel is working on proposals to address what it considers unwarranted differences in banks’ assessments of their balance-sheet risks. The calculations banks use ultimately determine their capital requirements. To stop banks underestimating potential losses, Basel wants to place global limits on how low capital can fall and it’s racing to meet a year-end deadline to complete the work.
“The obvious thing is to reconsider whether the floor should apply to retail mortgages,” Berg said. “That could be the thing which would make it easier to clinch a deal” for Basel. Sweden has a seat on the Basel Committee, while Denmark has just joined the Basel Consultative Group, which was created to help the committee work more closely with non-members.
“The optimal situation would have been that the Danish FSA got this seat three years ago, so we could have been part of the process,” said Jakob Jakobsen, chief economist at the Danish Bankers Association. “Two years ago, we could see that the proposals, with the business model that we have, would lead to an increase in capital requirements.”
Basel’s efforts to standardize risk models aren’t just under pressure from Scandinavia. The Netherlands and Finland have also voiced opposition. The Bundesbank’s top official for bank regulation, Andreas Dombret, said last month it’s working with Germany’s banking industry to assess Basel’s proposal, especially on mortgages. From what it’s seen so far, “there is a need to re-calibrate,” he said.
National regulators opposed to Basel’s capital floors argue the proposal fails to take into account parameters such as social safety nets that make debt repayment easier. It also ignores how easily borrowers can have their debts erased in some countries, they say.
Danish banks’ capital requirements would rise by up to 130 billion kroner ($19 billion) if Basel’s plan to impose capital floors moves ahead, according to industry estimates. In Sweden, the bill is more than twice that, at 365 billion kronor ($43 billion), according to calculations commissioned by the industry.
Denmark’s $430 billion covered bond market relies on specialized lenders issuing notes each year to fund residential and commercial mortgages. The Nordic country prides itself on the system, which it says hasn’t seen a default since being established in the late 1700s.
“With retail mortgages, there is almost no competition across borders,” Berg said. “It reflects the fact that this is a retail market and there are a lot of national differences that are difficult to assess for risk. The corporate lending is not a retail market, and it is easier to assess credit risk.”