COPENHAGEN, Jan 9 (Reuters) - The Danish market for "covered" bonds backed by mortgages - Europe's second largest and important for domestic banks - will suffer if proposed new liquidity rules for banks and mortgage firms are implemented in 2015, Europe's bank watchdog said.
The planned introduction of the so-called liquidity coverage ratio (LCR) could affect both pricing and the amount of mortgage lending to private households, the European Banking Authority (EBA) said on Thursday.
"The move ... to a system where these (covered bonds) will be limited to playing a smaller role will have a detrimental impact on the Danish covered bond market," the independent EU authority said in a report.
It said there would not be "any significant regulatory upside" from the implementation of the rules.
Under proposed new banking rules aimed at strengthening the financial sector, European lenders will have to hold a so-called liquidity buffer from 2015.
The buffer is to be made up of top quality assets akin to cash, such as government bonds, that can be sold easily so that lenders can withstand short-term shocks unaided by taxpayers.
The buffer, known as a liquidity coverage ratio, will be phased gradually with full compliance by 2019.
The EBA, however, has recommended to the EU Commission that Danish covered bonds should not be bracketed in the top tier of assets. That means banks would only be able to use such instruments to cover up to 40 percent of the liquidity requirement instead of 100 percent as is the case with government bonds.
Danish Minister for Economic Affairs Margrethe Vestager was critical of the EBA's report saying Danish covered bonds have proven to be at least as liquid as most government bonds and said she would travel to other EU-member states and meet with the Commission to argue her case.
Anders Jensen, the Denmark boss of Nordic banking group Nordea, told Reuters in December that if the European Commission decided to follow the EBA's recommendation it would impact the whole Danish economy.
He said the supply of Danish government debt was not big enough to meet the liquidity requirement.
The Commission is supposed to decide on whether to adopt the planned LCR-rule by the end of June at the latest.
In October 2013, Danish banks held 932 billion Danish crowns ($170 billion) in covered bonds, around a third of the outstanding total of 2.7 billion.
Nykredit is the biggest mortgage lender in Denmark, while Realkredit Danmark, a unit of Danske Bank , is the second biggest.
$1 = 5.4857 Danish crowns Reporting by Erik Matzen; Editing by Mark Potter