* Final CRD IV draft carves out Danish mortgages
* Prolonged lobbying success
* Boosts supply of liquid assets
By Owen Sanderson
LONDON, March 28 (IFR) - The latest draft of the EU’s mammoth bank regulation effort, CRD IV, accepts Danish claims that its covered bonds should be considered equivalent to sovereign paper.
The paper, released on Thursday, agrees to count certain covered bonds as “assets of extremely high liquidity and credit quality” - meaning they would be included along with sovereign bonds in the highest class of regulatory liquidity.
Banks will be able to hold as much of this liquidity category as they wish, with no haircut applied to asset values. Previously, covered bonds had only been considered level 2 assets, meaning banks could hold only 40% of their liquidity buffer in these assets, and the value of the assets would be haircut 15%.
The Danish government, which was president of the Council of Ministers in 2012, had successfully inserted this provision into Council and Commission drafts of CRD IV, but the new paper represents the final compromise between Council, Commission and Parliament, and stands a good chance of being adopted unchanged when the Parliament and Council vote again to confirm it next month.
According to the text, the only covered bonds allowed in liquidity category 1 are “covered bonds traded on transparent markets with ongoing turnover”. As most covered bond markets outside Scandinavia are ordinary OTC markets, this appears to be a direct reference to the Danish market, where bonds are traded on Nasdaq OMX and use a continuous tap issuance format.
Other covered bond markets, such as the German Pfandbrief market, do require market-making commitments from a panel of banks in specific size, but the issues are institutionally targeted benchmark bonds.
The Danish market has around DKK2.43bn (EUR326bn) outstanding, with around EUR3bn traded daily, including refinancing auctions, according to the Association of Danish Mortgage Banks.
A paper commissioned by the Basel Committee, and authored by a team from Copenhagen Business School, the BIS, and Danish Central Bank, found that the covered bond market was as liquid as the Danish government bond market, including periods of market stress.
The Basel Committee (the EU’s CRD IV is the European implementation of Basel III) came under pressure when drafting liquidity rules to create exemptions for countries with too few issued government bonds - of which Denmark is one.
The Danish bank sector has been lobbying hard to change European rules on liquid assets, since the banks would not be able to obtain enough sovereign bonds to meet the requirements.
Although the market has never seen a default, it has been tarnished recently, with S&P last week highlighting the large proportion of interest-only mortgages in Denmark, combined with falling prices in the housing market.
Reporting By Owen Sanderson; editing by Julian Baker