Frontpage News 2016 Direct Danish warn...

Direct Danish warning to the Basel Committee on Banking Supervision: you are severing the link between price and risk on mortgages

11 March 2016

​The appetiser before the inedible main course for Danish mortgages – the future capital requirements from the Basel Committee on Banking Supervision (BCBS) – has now been served.

The first course mentioned here is the standardised approach for credit risk, which is expected to be a building block in the future capital requirements that are feared by the mortgage sector in particular.

In a joint Danish consultation response submitted to the BCBS today, all three banking industry organisations, the Danish Bankers Association, the Danish Mortgage Banks' Federation and the Association of Danish Mortgage Banks, have jointly made alarm bells ring:
According to the consultation response, the proposal on the table can, in addition to sharply increasing prices on loans secured by real estate for both individuals and companies, also ultimately challenge the Nordic banking model.
 
“We specifically fear that they will choose to introduce a permanent capital requirement floor based on a ‘one size fits all’ standardised approach, which does not reflect low loss rates of, for example, Danish mortgages,” the CEO of the Danish Bankers Association, Ulrik Nødgaard, explains and continues:
“Such a floor will completely disconnect the link between risk and capital requirements - and thereby also loan prices. It could lead to serious consequences for home owners and companies, for who mortgage loans play a crucial role for their financial situation.”
 
In the long run, it would also be a threat to the Nordic banking model, where low risk loans are kept on the balance sheet, as noted by the Danish banking industry organisations in their joint consultation response.
The reason for this is that it will give incentive for institutions to move to loan categories with larger risks and yields that better reflect the capital requirements. Or alternatively, to shed low risk loans from their balance sheets.
 
Finally, it should once more be emphasised that we have not yet seen the final proposal from the BCBS on the capital floor for the IRB approach, which is the regulation that can seriously make life difficult for mortgage banks.
But there is a clear expectation that the standardised approach that is being introduced here will be used as a basis for setting the floor requirements for large credit institutions that use the IRB approach. This is the reason why the Danish Bankers Association – together with bank associations in the other Nordic countries – requested that the BCBS postpone the deadline for this consultation. In that way, it would be possible to assess the revised standardised approach in connection with the proposals for a revision of the IRB approach that is expected to be published for consultation in a few weeks. This request was regrettably not met.
 

Further information:
Communications Director, Nina Munch-Perrin: +45 3016 1006
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