Too-Big-to-Fail Mortgage Banks at Center of Danish Bail-In Clash

(Bloomberg) -- Should mortgage lenders be subject to the same resolution rules as other banks?

In Denmark, where lenders operating the world’s biggest covered-bond market are the backbone of the economy, the central bank and the government disagree on how to treat the industry in the event of a crisis.

Lars Rohde, governor of the central bank, says politicians are making a “mistake” by excluding the mortgage industry from the same bail-in rules that apply to other financial firms.

For now, Danish mortgage lenders face a national requirement to hold a debt buffer of 2 percent of loans, instead of a requirement to hold a minimum amount of own funds and eligible liabilities (known as MREL).

“The risk is that the buffer can’t be used and that you can’t secure recapitalization,” Rohde said in an interview in Copenhagen. His worry is that financial conglomerates that contain regular banking operations as well as mortgage lenders become “unsustainable” constructions if different resolution rules apply.

Read more: Danish SIFIs are set to get MREL demands by year-end

Nykredit Realkredit A/S is Denmark’s biggest mortgage lender. Danske Bank A/S, the country’s biggest financial conglomerate, owns the second-largest Danish mortgage lender. Nordea Bank AB, the largest Nordic lender, also has a Danish mortgage unit that enjoys the bail-in exemptions.

The past decade of regulatory reform has produced a framework in which “most likely several of the component parts don’t fit together,” Rohde said. “One way or another that needs to be fixed.”

Under Europe’s Bank Recovery and Resolution Directive, banks are given MREL requirements that can be eaten through if an institution gets into trouble. Denmark’s mortgage industry lobbied hard to be excluded from the framework, winning the government over with its arguments.

“When the legislation was passed on MREL a few years back, an extra buffer was added, precisely to address these issues,” said Ulrik Nodgaard, the head of Finance Denmark, which represents the country’s financial industry. “Our assessment is that it’s possible to come up with viable resolution plans with the current Danish rules” for mortgage lenders.

“The facts show it can be done, as there are currently resolution plans being drawn up inside this framework,” Nodgaard said.

Jesper Berg, the head of the Financial Supervisory Authority, declined to comment. In an interview last month, Danish Business Minister Brian Mikkelsen said the government is still “discussing” the issue. “We haven’t made up our minds yet. There’s an intense dialogue, including with the central bank, and I haven’t decided on it yet.”

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