Denmark pushes for compromise on bank liquidity

Banks in Europe may be allowed to use covered bonds to meet about 60% of their liquidity needs as talks move toward a compromise deal that would help avoid the sell-off the industry has warned against.

The threshold being discussed, which is 50% higher than a limit proposed last year by the European Banking Authority, has yet to be signed off on by all parties, Karsten Beltoft, head of the Mortgage Bankers’ Federation, said yesterday. The European Commission is due to announce its decision by next month.

Denmark, home to the world’s largest covered bond market per capita, has signalled it may still push to allow banks to use the securities for more than 60% of their liquid buffers. Lenders in the Nordic nation rely on mortgage-backed covered bonds for about 70% of their liquidity needs.

Talks so far have centred on the “unique characteristics” of Denmark’s mortgage market and the fact that covered bonds, which are mostly AAA-rated, have a proven record as stable funding, Mr Beltoft said.

“We are in regular touch with the Danes on the issue of how covered bonds will be treated,” Chantal Hughes, spokeswoman for Michel Barnier, the EU’s financial services chief, said in Brussels yesterday. “As previously indicated, the commission recognises that appropriate treatment for Danish covered bonds is warranted.”

Still, legislation won’t be adopted until the summer and “we can’t pre-empt what will be in that text, which also requires college endorsement”.

Danish economy minister Margrethe Vestager met with Mr Barnier today to discuss the matter, she said.

Denmark has been lobbying the EU to ignore the EBA’s proposal, which echoes rules set by the Basel Committee on Banking Supervision in 2010. It’s still unclear whether the commission will adopt Basel and EBA targets forcing banks to book covered bonds at only 85% of their market value, Mr Beltoft said. Denmark’s mortgage bond industry considers it key a compromise on so-called haircuts also be reached, he said.

Nordea Bank, Scandinavia’s biggest lender, is already preparing for an outcome that will turn covered bonds into Level 2 assets, albeit with some “special privileges,” Anders Jensen, chief executive of Nordea Denmark, said last week.