- Posted September 17, 2013 by
Bradley Associates about Banks in Denmark Win Government Support
Denmark’s government said it has no intention to ask banks to adjust a mortgage refinancing model that Standard & Poor’s says has exposed the industry to a liquidity shock.
One-year mortgage bonds used to finance loans as long as 30 years pose no risk to Denmark’s $340 billion economy and banks shouldn’t be forced to stop selling them, Business Minister Henrik Sass Larsen said.
“We don’t consider the one-year adjustable-rate mortgage bonds a problem or a risk,” Sass Larsen said yesterday in a phone interview from Copenhagen.
S&P said this month banks in Denmark’s $500 billion mortgage bond market are putting themselves at risk by relying on a model that requires them to return to market every year. Industry efforts to mitigate those risks by spreading annual auctions over quarterly refinancing’s aren’t enough, S&P analyst Per Tornqvist said this week. He warns that banks are unlikely to adjust their funding model without government guidance.
According to Sass Larsen, the industry has already done enough to address any funding mismatch.
“The refinancing risk has been distributed throughout the year, which makes it improbable they should carry a risk,” he said. “Besides, they’ve performed very well during the financial crisis.”
Nykredit Realkredit A/S’s index of the most-traded Danish mortgage bonds has returned 35 percent since the end of September 2008, when the collapse of Lehman Brothers Holdings Inc. sent global financial markets into a tailspin. U.S. Treasuries longer than one year have returned 20 percent over the same period.
Nykredit is Denmark’s biggest mortgage bank and Europe’s largest issuer of mortgage-backed covered bonds. Denmark’s biggest bank, Danske Bank A/S (DANSKE), is the parent of Realkredit Danmark A/S, the nation’s second-largest mortgage lender.
According to S&P, “Danish banks score comparatively poorly to their peer group of banks globally” in a ranking of how well lenders can withstand a liquidity drought.
Since the 1990s, Denmark’s mortgage-bond market -- the world’s largest per capita -- has moved away from traditional fixed-rate, callable-at-par securities into more varied debt instruments. S&P’s doubts as to the sustainability of the development are echoed by Moody’s Investors Service and Denmark’s central bank.
Adjustable-rate mortgages were introduced in 1996. Interest-only loans, which the central bank has criticized for exacerbating volatility in the country’s property market, were first sold in 2003.
“Mortgage lenders made adjustments to their products on their own initiative, and that suits us well,” Sass Larsen said. “You won’t see this government coming forward with a ban on these bonds.”
About 50 percent of Danish borrowers refinance their mortgages each year, resulting in bond sales as high as $228 billion annually, the Financial Supervisory Authority in Copenhagen estimates. That’s an amount equal to about 66 percent of Denmark’s economy.
Denmark’s mortgage banks agreed to move to quarterly auctions of adjustable rate mortgages in 2009, a year after the collapse of Lehman Brothers froze short-term funding markets. They have since largely based new loans on bonds maturing in April, July and October, reducing the amount needed to be refinanced in December to about half.
“Banks, mortgage lenders are on top of these issues themselves, so there’s really no reason for me to step in,” Sass Larsen said.