Dutch Mortgage-Bond Market Threatened by Capital Rules, DSA Says

New bank capital rules risk undermining demand in the 262 billion-euro ($342 billion) market for Dutch residential mortgage-backed securities, according to an industry body.

Banks and insurers, the biggest sellers and buyers of RMBS, will have to match capital reserves with the perceived riskiness of the assets they own, under regulations from the European Commission. That will deter them from buying RMBS because most lack the right tools to calculate risk weighting, according to the Dutch Securitisation Association.

“If investors have to keep much more capital because they don’t have the instruments to make the correct assessment, they won’t buy the securities anymore,” said Rob Koning, director of the DSA in Amsterdam, which was set up by banks and insurers last year to increase transparency in Dutch securitization transactions.

Issuers in the Netherlands already face higher funding costs because Dutch RMBS -- which have an average loan-to-value ratio of 95 percent -- may not qualify as liquid assets under new regulations capping the ratio at 80 percent. Koning says the new capital rules will cause even more pain by deterring investors from buying the securities altogether.

“The proposed liquidity rules are inconvenient but they aren’t the biggest issue,” he said. “The biggest issue is clearly the capital requirements. RMBS are an important funding source for banks and insurers in the Netherlands.”

Funding Gap

Dutch banks are the second-largest issuers of RMBS in Europe, relying on sales of the securities to help fill a 452 billion-euro funding gap between deposits and loans, Dutch central bank data show.

European banks may have to hold an extra 41 billion euros of capital just to keep their investments in RMBS, according to estimates by Bank of America Merrill Lynch.

Demand for Dutch RMBS has already shrunk, partly due to “uncertainty about the future treatment of securitizations under various regulatory regimes,” according to an April 16 report from the nation’s central bank. Investors bought 13.1 billion euros of Dutch packaged loans, mainly RMBS, in 2012, about half the amount purchased in 2010, the report found.

Under the latest rules, which are designed to prevent a repeat of the 2008 global financial crisis, financial firms must hold more higher-quality capital against more conservatively calculated risk-weighted assets.

Weighing Risk

The weighting depends on the likelihood of default and losses that would be incurred as a result. While Dutch RMBS, with their high underlying loan-to-value ratio, appear risky they have proved to be among the world’s safest mortgage bonds.

Although Dutch home prices fell by more than 10 percent last year and 19 percent since 2008, according to the national statistics agency, cumulative defaults on loans packaged into securitizations was 0.4 percent at the end of September, Moody’s Investors Service data shows. That compares with 2.85 percent on Spanish mortgages, where the average loan-to-value ratio is less than 80 percent.

“The economic drivers that dictate asset performance vary greatly across asset classes and jurisdictions,” according to a March 15 letter addressed to regulators from the Dutch Banking Association. “Especially mortgages have different risk characteristics in comparison to other assets. Not distinguishing between asset classes penalizes assets with below average risk weights.”

Government Proposal

Dutch authorities are also seeking to protect mortgage lending. A government-commissioned group led by Kees van Dijkhuizen, NIBC Holding NV’s chief financial officer who will be joining ABN Amro Group NV in the same role in May, has proposed packaging state-backed portions of home loans in a national mortgage body funded through sales of covered bonds guaranteed by the government. The securities would yield more than government bonds and less than current securitizations, boosting their appeal to buyers and reducing costs for issuers.

“The initiative may be supportive,” said Koning. “It could mean the securities could be considered government paper, eliminating the capital issue and the issue of how to assess the mortgage portfolio.”

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