UPDATE 2-EU backs Denmark in mortgage bonds dispute

Fri May 9, 2014 12:00pm EDT

Related Topics

* EU believes Danish mortgage bonds are a top liquid asset

* Puts EU at odds with global regulators

* Danish banks could use current holdings to meet new rule (Adds detail on global rules)

By Teis Jensen

COPENHAGEN, May 9 (Reuters) - The European Commission believes Danish mortgage bonds count as an asset that banks can use to meet the bulk of a new regulatory requirement, avoiding potentially major disruption for Denmark's finance industry, the country's government said on Friday.

Banks across the world are being required by regulators to create a buffer of highly liquid assets that would allow them to survive a month-long shock in financial markets without aid.

A global agreement on bank capital and liquidity, known as Basel III, had not put mortgage bonds in the top liquidity class of assets that could be used by banks in their buffers.

That would be a big problem for Danish banks, which have large holdings of so-called covered bonds and, because Denmark does not have much government debt, do not have an obvious domestic alternative to use for their liquidity buffers.

It would also put a question mark over the future of the country's covered bond market, Europe's second largest.

"This is a major step forward, now it is about ensuring that the principles in the proposal also find their way to the final rules," Denmark's Minister for Economic Affairs and the Interior, Margrethe Vestager, said in a statement.

The Commission, which has the final decision on the matter, is proposing that Danish mortgage bonds which fulfil key requirements may account for up to 70 percent of an individual bank's liquidity.

"If the proposal is enacted in its current form it would allow Danish mortgage institutes to hold covered bonds in about the same quantity as they do today," the ministry said.

The European Banking Authority (EBA), an EU watchdog, had said late last year that Denmark's mortgage bonds, a common way to finance houses, should not be classified among the most liquid instruments.

Denmark's $500 billion mortgage bond industry, originally founded in 1795 to rebuild Copenhagen after a devastating fire, had enlisted the support of the country's politicians to lobby against the EBA proposal.

Basel III is the world's main regulatory response to the 2007-09 financial crisis and was endorsed by leaders of the G20 economies, including the European Union.

Under the accord, up to 60 percent of a bank's liquidity buffer must be in the form of cash or top rated government bonds. Mortgage bonds can only be included, subject to a discount, in the remaining 40 percent of the buffer.

The Basel Committee, which had no comment, is made up of banking supervisors from the G20 countries and has already criticised the EU for deviating from the accord, though it has no power of sanction. The European Commission was not immediately available for comment.

The EBA backed Basel over covered bonds because it does not have enough data to show they can withstand extreme distress. The EBA said the European Commission was still working on completing the new liquidity rules for banks. (Additional reporting by Huw Jones in London; Editing by Terje Solsvik and Mark Potter)

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