Basel Rule Blitz Forces Danes to Fix $420 Billion Bond Market

Denmark’s government is ready to tackle liquidity shortages that have hit the world’s biggest market for mortgage-backed covered bonds, as it addresses risks that both the industry and investors warn are a serious side-effect of global regulation.

Business Minister Troels Lund Poulsen told Bloomberg he will back a proposal by a government-appointed panel to stop forcing mortgage lenders to offer loans based on two benchmark interest rates, Cita and Cibor. Freeing lenders to limit their loan offering to only one of the two rates will reduce the number of series and increase liquidity. But the minister says he’s also willing to consider more steps as he pledges to fight the Basel Committee on Banking Supervision on plans he warns could “destroy” Denmark’s mortgage market.

Troels Lund Poulsen

Photographer: Ole Jensen/Corbis via Getty Images

The government-appointed panel’s proposal is “good” and “we’re going to deliver on it,” Poulsen said in an interview in Copenhagen. The recommendation affects about a fifth of Denmark’s $420 billion mortgage bond market. But “we clearly need to have a more thorough discussion” to address broader liquidity issues, he said.

Liquidity Data

There’s plenty of evidence that buying and selling top-rated Danish mortgage bonds is getting harder. According to a survey of investors released in August, trades in Danish mortgage bonds that once took as little as two minutes can now drag out a full day. When big trades go through, price disruptions are about four to five times what they were a decade ago.

Scandinavia’s two biggest banks, Danske and Nordea, are only doing two-thirds of the repo agreements they used to do in mortgage bonds. Market participants “have either disappeared, or their influence on the market has been reduced,” according to Peter Andersen, head of markets at Jyske Bank and a member of the Danish Securities Dealers Association. What’s more, Danish covered bond holdings by banks have dropped by almost 50 percent since 2014.

The industry says most of the development stems from stricter regulations such as those requiring banks to comply with stable funding rules and to be ready for the shock that would come from a sudden market freeze.

Costly Rules

Such rules “have a kind of logic, but they come at a cost,” said Ane Arnth Jensen, the head of the Association of Danish Mortgage Banks.

Denmark’s mortgage bond market is the country’s most liquid by far, with an outstanding amount that’s about 1 1/2 times gross domestic product. Its liquidity lays the foundation for how well the economy functions. And after almost half a decade of negative interest rates, a world record, Danes get paid to borrow short-term (excluding fees), and pay less than the U.S. government to get financing over 30 years.

The government-appointed panel on Friday presented a number of proposals designed to rein in the industry’s ability to charge fees in an effort to reduce household mortgage costs. The recommendations, which Poulsen has already signaled he will broadly back in talks with parliament, come amid warnings from the central bank that parts of Denmark’s housing market are overheated.

Housing Bubble

Eight years after Denmark’s most recent property bubble burst, apartment prices in Copenhagen are roughly 11 percent above their 2006 pre-crisis peak, according to Danske Bank.

Poulsen said the government’s efforts to restrict mortgage fees will counter rising costs stemming from global regulators. The Basel Committee wants banks to comply with minimum capital requirements that the Danish mortgage industry says ignore the health of its loan books.

“I think one should assume Basel will come up with more regulation that will increase requirements in Denmark,” Poulsen said. “Basel is working very determinedly on this and the important thing will be to ensure that it doesn’t destroy our mortgage finance system.”

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