Danish Mortgage Lenders Told to Stop Whining About Capital

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(Bloomberg) -- Denmark’s mortgage industry needs to stop complaining about the cost of complying with new capital rules for banks and focus on more pressing challenges, according to the country’s top financial regulator.

Mortgage lenders won’t have any difficulty in generating the capital they’ll need under standards set out by the Basel Committee on Banking Supervision late last year, Jesper Berg, director general of the Financial Supervisory Authority, said in an interview in Copenhagen.

Berg said the industry should instead address refinancing risks created by the use of bonds with short maturities and those denominated in foreign currencies. The result of years of financial innovation, these risks pose a real threat to the system if markets freeze up as they did during the financial crisis.

“These are extreme tail-risk problems, but they are problems that we have historically avoided,” Berg said. “We should do our utmost to keep the system on the narrow path of stability.”

Internal Models

The mortgage market is the backbone of Denmark’s financial system. The 3 trillion kroner ($486 billion) in outstanding bonds outstrip the $350 billion economy, and the securities make up a large chunk of banks’ liquid assets. Previous FSA efforts to rein in the industry have focused on limiting loan growth and steering banks away from issuing short-term bonds to fund 30-year loans with adjustable rates.

Fixed-rate home loans rose in March to their highest level -- 41 percent of total mortgages -- since 2010, the Danish central bank said on Monday. Mortgages costs, including interest rates and fees, meanwhile, fell to a new low of 2.19 percent, the bank said.

Now lenders face limits on how low they can drive their capital requirements by measuring asset risk using their own statistical models.

In December, the Basel Committee completed the Basel III capital standards, including a so-called output floor. Under this measure, banks’ total assets weighted for risk using their own models can’t be less than 72.5 percent of the amount calculated with a formula provided by the regulators, known as the standardized approach.

The Danish banking industry estimates that the new Basel standards will push up total capital requirements by roughly a third, driven mostly by the output floor. A lobbying effort is under way to convince European Union lawmakers to soften the standards when they’re integrated into the bloc’s capital rules. Berg said the industry makes enough money to meet the demands.

In addition to refinancing risks, the mortgage industry faces a potential threat from a requirement to provide supplementary collateral if house prices fall, something that has happened in the past.

“This creates some potential cash-flow problems, which could be a risk in a situation where financial markets behave the same way as during the financial crisis,” Berg said.

©2018 Bloomberg L.P.

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