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Denmark aims to reduce bank refinancing risks in covered bond market
November 7, 2013 / 1:41 PM / 4 years ago

Denmark aims to reduce bank refinancing risks in covered bond market

* New bill adresses risks of Danish mortgage lenders

* It implies one-year bonds could be transformed into long-term bond

* Investors will carry the risk for the extension

By Teis Jensen

COPENHAGEN, Nov 7 (Reuters) - The Danish government plans to put forward a bill to reduce the risk banks face when they refinance their adjustable-rate mortgage bonds.

Denmark has the third-biggest covered bond market in the world after the United States and Germany, and credit rating agencies and the European Commision have raised concerns about these loans, saying banks are at risk should international debt markets freeze up.

Danish banks have suffered heavily from a burst property bubble and a struggling agricultural sector.

The bonds, which are refinanced at large auctions every year, have received strong investor appetite, helping keep borrowing costs for homeowners down.

But ratings agency Standard and Poor’s lowered its outlook for Danske Bank’s rating to stable from positive in July due to the funding risks at the auctions.

The government proposed that if a refinancing auction failed the one-year bonds should be transformed into convertible bonds with a maturity of up to 30 years with a coupon yield equal to the existing coupon plus 5 percentage points.

“The change should be seen in light of the increasing attention lately to the refinancing risk associated with adjustable-rate mortgage loans,” Business Minister Henrik Sass Larsen said in a statement on Thursday.

“This is seen as an important initiative,” mortgage analyst Lene Boisen from Jyske Bank said.

Under the existing rules the mortgage lenders would have to put more capital aside to keep their credit ratings and fulfil the requirements from planned European regulations.

“That is too expensive for them. So to avoid being downgraded they have to do this,” Boisen said.

The bill, which the minority centre-left government will now seek parliamentary support for, implies that investors owning the bonds will carry the risk for the extension.

“However, this risk is likely to be low. Therefore, the assessment is that the interest rate on the relevant mortgage bonds will not be significantly affected,” the Business Ministry said.

Danish homeowners held a total of 1,175 billion Danish crowns ($213 billion) in one-year adjustable rate loans by the end of July, corresponding to 47.5 percent of the total mortgage loans.

Danish household debt is at around three times annual disposable income, a high level in an international context.

Nykredit and Nordea are also among the largest mortgage lenders in Denmark.

The bill is intended to come into force on Jan 1.

$1 = 5.5141 Danish crowns editing by Ron Askew

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