Denmark shoots down covered bonds idea

Nils Bernstein, the governor of the National Bank of Denmark, warned that new regulation to ease the requirements for Danish covered bonds would harm the Danish mortgage market in the long run.

Under current rules, if the value of the property declines and the covered bond loan then exceeds 80% of the property value, the issuing mortgage credit institute has to find additional collateral for the mortgage. However, new regulation will ease the requirements for Danish covered bonds if loans exceed 80%of the property value due to declines in property prices.

In a speech at the Annual Meeting of the Danish Mortgage Banks' Federation last Wednesday, Bernstein said it was impossible for credit institutions to be forced to make these changes and doubted that it would benefit Danish mortgage credit in the longer run. "We should not introduce the slightest doubt about the quality of Danish covered bonds," he said.

However, the governor later added that adjustments to legislation on covered bonds may be necessary to ensure creditors are properly insured against sufficient collateral.

The governor also signalled that interest rates would rise in the near future. "I am quite sure that rates on one-year adjustable rate mortgages cannot be sustained at the current low level. I will not try to predict when it will rise. But I advise homeowners and others against stretching their budgets so tight that they can only make ends meet at the current very low interest rate level." However, he also added that if low growth continues in the euro area, tightening may be postponed.

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