Danish Banks Face Tougher Credit Rules to Tackle Record Debt

Denmark’s financial regulator is looking into the option of cracking down on banks’ lending policies to address the nation’s record household debt load.

“The subdued growth in consumption is related to the excessive debt-taking going on prior to the crisis,” Ulrik Noedgaard, director general of the Financial Supervisory Authority in Copenhagen, said in an interview. The FSA and the Danish Business Ministry are now considering “more directly regulating the credit policies” of mortgage banks, he said.

The new FSA regulations would come on top of soft limits on interest-only and adjustable-rate mortgages, which the Copenhagen-based agency plans to begin discussing with the industry next month, Noedgaard said.

Denmark is reining in its $550 billion home loan industry, the world’s biggest per capita, after cheap credit fed a borrowing spree. Danes owe their creditors 321 percent of disposable incomes, a world record and a level that warrants a policy response, the Organization for Economic Cooperation and Development said in November.

Denmark’s consumers are backed by some of Europe’s biggest pension savings, at about 1 1/2 times gross domestic product, central bank figures show. While the structure of the nation’s housing market and pension system mitigates some of the credit risks, Noedgaard said debt levels are hampering consumer spending, which makes up half Denmark’s $340 billion economy.

Burst Bubble

“Analysis shows that people who are more indebted are scaling back more on consumption than others,” Noedgaard said.

Denmark already has tightened lenders’ credit policies by mandating as of May 1 that banks ensure borrowers seeking adjustable-rate, interest-only loans can afford traditional fixed-rate loans, according to the Association of Danish Mortgage Banks. It urged the FSA to guarantee additional steps don’t disrupt competition and aren’t imposed too quickly.

“We can’t just shrink the balance sheet,” Jan Knoesgaard, the association’s deputy director, said by phone. “The mortgage banks can’t call the loans.”

Household borrowing from mortgage lenders and banks stood at 1.88 trillion kroner ($345 billion) in October, the majority of it home loans, after peaking at 1.91 trillion kroner in December 2012, according to central bank statistics.

Tax Cap

Some mortgage banks agree that lending practices need to be adjusted to prevent another housing bubble like the one that burst in Denmark in 2008. Realkredit Danmark A/S, the mortgage arm of Denmark’s biggest lender Danske Bank A/S, has suggested cutting legal loan-to-value limits to prevent households taking on too much debt during real estate booms.

The central bank has also argued in favor of removing a cap on property taxes to curb demand in boom cycles.

While most households could survive an interest-rate jump, high indebtedness is curbing spending and economic growth, Denmark’s Systemic Risk Council said Jan. 6.

An industry that before 1996 was dominated by “having principal repayments and fixed rates,” has now “sort of ended up in another corner,” Noedgaard said. Denmark now has “a significant amount of interest-only loans and significant use of variable rates.”

More than half of Denmark’s households don’t amortize their mortgages. In the third quarter, 57 percent of loans to owner-occupied dwellings and holiday homes were interest-only, according to the Danish Association of Mortgage Banks. Two-thirds were financed using short-term mortgage bonds.

Right Balance

While acknowledging the need for some correction, the industry warned tightened regulations too much also risks damping economic growth.

“The high debt is a risk for growth; that might be true,” said Karsten Beltoft, director of the Danish Mortgage Bankers’ Federation, whose members include Danske Bank A/S and Nordea Bank AB’s Danish unit. “But not having the possibility to lend will also reduce growth, so it’s a question of finding the right balance.”

“The idea now is to move slowly, and gradually move a little away from the position that we are in,” said Noedgaard at the FSA.

Since 2008, Denmark’s household spending has grown just 0.5 percent, the government estimates. That compares with 7.5 percent growth in Sweden over the same period.

Low lending demand is likely to weigh on Denmark’s finance industry for years to come, said Andreas Hakansson, a Stockholm-based bank analyst at Exane BNP Paribas in an e-mail in response to questions.

“There is a real need for deleveraging in Denmark in order to minimize” the risks when interest rates raise, said Hakansson, who has an underperform rating on Danske Bank A/S. “This deleveraging makes us believe bank earnings and GDP will grow slowly over the next few years.”

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