Danish Mortgage Lender Seeks Sifi Stamp to Seal Industry Brand

Denmark’s fifth-largest mortgage lender, with a market share of about 5 percent, wants to be named too big to fail as the industry seeks a single rule book to avoid any contagion effect if a bank collapses.

DLR Kredit A/S wasn’t included among the six banks and mortgage lenders identified as systemically important financial institutions by a government-appointed committee last month. The Copenhagen-based lender is now seeking Sifi designation, including the tougher capital requirements and oversight that will entail, according to Jens Moeller, DLR’s managing director.

“The products we sell are perceived as a single product,” Moeller said today in an interview. “If one bank runs into trouble, it will spread to all the others.”

Investors seeking a haven from Europe’s debt crisis have flocked to Denmark’s $500 billion mortgage-bond market, drawn to the AAA rated covered bonds even as a housing slump is mired in its fifth year. The market’s uniformity and depth has attracted Pacific Investment Management Co. and led billionaire investor George Soros to urge the U.S. to adopt a similar system.

Interest rates at record lows have cushioned an economic contraction and held foreclosures at bay. Economy Minister Margrethe Vestager said in February Denmark will do “whatever it takes” to protect the system. According to the industry, that should include applying the Sifi designation to all institutions.

‘Funding Boat’

“We are all in the same funding boat,” Karsten Beltoft, head of the Copenhagen-based Mortgage Bankers’ Association, said. “You can say the same of banks but it’s especially true of mortgage banks. We are more vulnerable because we have only this one funding tool.”

Danish mortgage lenders can’t take deposits and fund mortgage loans by issuing covered bonds. Under the country’s unique system, banks pass through the interest rate risk to borrowers and bondholders while retaining the loans and credit risks on their books.

The system’s uniformity has a downside, Beltoft said.

“Investors will think that if one mortgage bank has a problem, it is a structural problem,” he said. “They more or less see covered bonds as one thing and maybe are not so clear about the differences between covered bonds” from different issuers.

The government committee identified Danske Bank A/S, Nordea Bank Danmark A/S and Nykredit A/S among the six Sifis based on the size of their assets, lending and deposits relative to the economy. Though DLR failed to meet those criteria, the committee suggested the lender nonetheless be considered a Sifi because of its importance to the agricultural industry.

Danish lawmakers will take up the committee’s recommendations in coming weeks after a public comment period ended last week. Even if they don’t include DLR among the Sifis, the market may eventually, Moeller said.

“We think that the market will demand that we fulfill nearly the same demands,” he said. “The majority of the demands need to be filled by 2020, and I think we can handle that.”