Denmark Rejects S&P Warning to Tighten Covered Bond Rules

Denmark’s government isn’t planning to tighten covered bond rules on short-term funding beyond measures already laid out, rejecting warnings from Standard & Poor’s that stricter standards are needed.

“We have no such plans currently,” Benny Engelbrecht, business spokesman for the ruling Social Democrats, said in an e-mailed reply to questions.

S&P said last week existing proposals in Denmark and the rest of Europe to cut banks’ reliance on short-term borrowing weren’t enough to contain funding risks. The rating company lowered its outlook on Copenhagen-based Nykredit Realkredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds, warning downgrades would follow if “funding profiles do not improve materially over the short term.”

S&P is adding its voice to warnings from Moody’s Investors Service and the central bank, which have urged lenders in Denmark’s $500 billion mortgage market to do more to match funding and lending maturities. One-year bonds used to finance 30-year mortgages in Denmark -- home to the world’s biggest home-loan market per capita -- made up 28 percent of the total last quarter, according to Realkredit Danmark A/S, the mortgage unit of Danske Bank A/S.

A committee appointed by the government to identify Denmark’s too-big-to-fail banks said in March systemically important lenders should aim to comply with a basic stable funding level from 2014. That’s four years earlier than a target set by the Basel Committee on Banking Supervision for its guidelines, which Denmark says it will incorporate into its final rules.

‘Not Sure’

“The government is of course planning to implement both the Capital Requirement Directive IV and the proposed legislation for systemically important financial institutions,” Engelbrecht said. Lawmakers will follow recommendations from Denmark’s Systemic Risk Board to push the existing proposals through as soon as possible, he said.

“It’s a step in the right direction that the Sifi proposal raises the issue of the funding mismatch,” Alexander Ekbom, a Stockholm-based S&P credit analyst, said yesterday in a phone interview. “But we’re not sure that it will lead to a sufficient solution.”

The yield on Nykredit’s 3.5 percent interest-only bond due 2044 rose to 3.673 percent at 11:29 a.m. local time compared with 3.666 percent yesterday, according to Bloomberg generic prices.

S&P said in its July 19 report that Denmark’s mortgage finance model sets its “banking sector apart from most banking markets within the European Union, where mismatches are lower.”

‘Very Limited’

The rating company also cut its outlook to negative from stable on the credit grades of BRFkredit A/S and reduced the outlook to stable from positive on Danske and DLR Kredit A/S. S&P rates Nykredit A+. Moody’s, which Nykredit fired last year after criticizing the rating company’s methodology, gives Denmark’s biggest mortgage bank a Baa2 grade, two steps above junk.

Danish mortgage banks have cut issuance of one-year bonds since the second quarter of 2012, according to data provided by Realkredit Danmark. The loans accounted for more than 30 percent of the total just over a year ago.

Still, banks in the Nordic country are unlikely to take adequate steps to reduce their funding risks without regulatory interference, according to S&P. So far, the Sifi committee’s guidance on the subject is “very limited,” Ekbom said.

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