ERU, Alm.del - 2015-16 - Bilag 119: Erhvervs- og Vækstministeriets grund- og nærhedsnotat samt høringssvar om dækkede obligationer

Erhvervs-, Vækst- og Eksportudvalget 2015-16
ERU Alm.del Bilag 119
Offentligt

Commissioner Jonathan Hill

European Commission

DG Financial Stability, Financial Services and Capital Markets Union

Brussels

MINISTER FOR BUSINESS AND

GROWTH

MINISTRY OF

Dear Commissioner Jonathan Hill

Thank you for the opportunity to respond to the Commission consultation

on covered bonds in the European Union.

As I am sure you are aware, covered bonds play a very important role in

the Danish economy due to the well-functioning Danish mortgage credit

system. More than 60 per cent of domestic lending to companies and

households is based on covered bonds and the Danish covered bond mar-

ket is among the largest in Europe also in absolute terms. In light of our

long and positive experiences with covered bonds I appreciate the Com-

mission’s intention to explore the considerable potential in a more inte-

grated covered bonds market in Europe building on and taking into ac-

count well-functioning national systems.

I believe that a covered bonds framework in the European Union building

on core elements of the Danish mortgage credit system would create the

right conditions for an increased use of covered bonds across Europe.

I would like to point out a couple of useful facts about the Danish mort-

gage credit system which highlight the stability of our framework. First,

Danish mortgage credit institutions have historically experienced very

low losses – also during periods of economic and financial stress. No

Danish mortgage credit institution has ever defaulted and their covered

bonds have never led to credit losses for investors. This was also the case

during the recent financial crisis.

From mid-2007 to mid-2013 housing-prices in Denmark fell around 20

per cent. Nevertheless, the Danish mortgage credit institutions fulfilled

the requirements as laid down in CRD III and raised additional collateral.

During this period the Danish mortgage credit institutions even raised

collateral above the legal requirements.

Secondly, Danish covered bonds were just as liquid as Danish govern-

ment bonds during the financial crisis. The proven high liquidity charac-

teristics of Danish covered bonds are also to a large degree reflected in

BUSINESS AND GROWTH

Slotsholmsgade 10-12

1015 Copenhagen K

Denmark

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+45 33 92 33 50

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[email protected]

www.evm.dk

ERU, Alm.del - 2015-16 - Bilag 119: Erhvervs- og Vækstministeriets grund- og nærhedsnotat samt høringssvar om dækkede obligationer

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the treatment of level 1 covered bonds in the LCR. This underlines the

robustness of the system and the quality of such bonds as liquid assets.

Following the above, Danish covered bonds are very secure AAA-rated

products and I believe that experiences can be gained from our system. At

the same time, I find it important to highlight that developing a European

covered bond framework should not become a one-size-fits-all exercise.

As pointed out by the Commission, European action in this area must

build on and leave room for existing well-functioning national covered

bond markets.

In this context it is important to keep in mind that in some markets mort-

gage credit institutions are specialised institutions whose assets are in fact

limited to cover pools and which cannot take deposits. Specialised institu-

tions are not exposed to the same risks as universal banks. For example,

there is no risk of a bank run in a specialised institution and all loans are

mortgages secured by real estate subject to specific loan-to-value (LTV)

limits. In the same vein, asset encumbrance is not a problem as there are

no depositors and, following this, creditors are only bondholders or junior

creditors.

Another difference between a specialised institution and a universal bank

is that it is not possible to exclude loans from the cover pool in a special-

ised mortgage credit institution – either wholly or in part. This follows

from the match funding principle which ensures a close match between a

loan and the bonds funding the loan. Furthermore, an exclusion from the

cover pool would require the use of other loan funding instruments, which

are not present in non-deposit taking Danish specialised mortgage credit

institutions.

As a consequence of these differences between specialised institutions

and universal banks, specialised institutions should not always be subject

to the same requirements as universal banks, whose assets are wider

spread and not limited to a cover pool.

From a Danish point of view, it would be vital that core elements of the

Danish mortgage credit system are maintained, including:

Specialised institutions funding loans solely through the issuance

of bonds and not e.g. through deposits,

Match funding, where there is a close match between a loan and

the bonds funding the loan which effectively limits market and

funding risk,

The balancing principle, which effectively limits both liquidity

and market risk,

ERU, Alm.del - 2015-16 - Bilag 119: Erhvervs- og Vækstministeriets grund- og nærhedsnotat samt høringssvar om dækkede obligationer

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A capital centre structure with separate risk-based capital re-

quirements to each centre and to the mortgage credit institution in

general in order to account for loan loss risk in different stress

scenarios,

A capital centre structure without requirements specifying that

each capital centre should be a separate legal entity,

Specialised insolvency rules enabling a non-forced and gradual

winding down of the mortgage credit institution.

To the extent that it proves possible to maintain such features, the Danish

government is supportive of further regulatory convergence in relation to

covered bonds in the form of an EU directive. We support a directive and

not a regulation as a directive entails national flexibility when implement-

ing the directive into national legislation. This national flexibility is im-

portant in order to take national specificities into consideration.

I look forward to our continued dialogue on the future of covered bonds

in a European context just as my services are ready to engage with the

Commission for any further information that your services may require.

In the enclosed annex you will find answers to the specific questions in

the Commission consultation paper.

Yours sincerely,

Troels Lund Poulsen