Danish Mortgage Banks Gird for Tougher Rules as Basel Dominates

Denmark’s government is telling the country’s $400 billion mortgage-backed covered bond industry to gird for stricter capital rules as lawmakers and bankers acknowledge they’re unlikely to get their way in their fight against global regulators.

“We must accept” that stricter buffer requirements for mortgage banks are coming, Danish Business Minister Troels Lund Poulsen told Bloomberg on Friday.

The comments come as European Union Financial Services Commissioner Jonathan Hill meets with Danish lawmakers and bankers in Copenhagen to listen to their plea that Europe ignore the Basel Committee on Banking Supervision and instead design its own regional covered bond rules. Poulsen said it was encouraging that Hill was willing to listen, but warned that, as things look now, it’s unlikely that Denmark will get its way.

Hill said there is scope to “deviate” from Basel if necessary. The commission will act in a way that is in the “interest of the European economy,” he said. “I’m going to approach this by looking at the credential needs, also by looking at the real world impact, and take a sensible, balanced approach,” he said.

Jesper Berg, the head of Denmark’s Financial Supervisory Authority, said Hill’s comments were positive. “But it’s important to remember that he’s only one of many decision makers on this,” he said.

Denmark has teamed up with Sweden, Finland and the Netherlands to take on Basel. At issue is the treatment of an asset class that the Danes and their allies say has proven its resilience during crises. They say that using internal models to calculate risks allows issuers to better reflect that history. But the U.S. is pushing Basel to require minimum capital levels -- so-called floors -- to prevent issuers basing capital ratios on optimistic views of their portfolios.

Before Friday’s meeting, the head of the Danish Bankers Association, Ulrik Noedgaard, said that the battle against Basel was becoming increasingly hard to win.

“It looks very difficult,” Noedgaard said on Thursday. “We’re trying very hard and spending a great many resources on this, but from what we’re getting back from our effort in Brussels, Basel and London, it seems an uphill battle.”

Noedgaard said Denmark’s mortgage industry may need to decide on a potential level for capital floors that it will be ready to accept as efforts to fight Basel hit a wall.

“Obviously, if we can’t make capital floors go away the next step is to work
on what levels the floors will be set at,” Noedgaard said. “The opposition we face originates largely from the U.S.,” where regulators are “very much” against internal ratings-based models, he said.

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