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.
No Ban
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.
