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At stake is Denmark’s $550 billion mortgage-backed covered bond market, the world’s largest per capita, which the government in Copenhagen says would be penalised by Basel rules that limit bank holdings of the securities. Denmark has argued it doesn’t have enough government bonds, favored by Basel, to make up for the shortfall in banks’ liquidity buffers.
On Friday, Denmark said the European Commission had listened to its concerns and will now recommend letting banks hold 75 per cent more in covered bonds than Basel rules allow. Though the Commission still has until June 30 to reveal its final decision, the development marks a victory for Denmark, which doesn’t hold a seat on the 27-member Basel Committee for Banking Supervision.
Banks will be allowed to book the most liquid covered bonds - securities backed by pools of mortgage assets - at 93 per cent of their market value, compared with Basel’s target of 85 per cent, Denmark’s economy ministry said Friday. Lenders will also be free to use the bonds for as much as 70 per cent of their liquidity buffers, versus 40 per cent under Basel III rules. The plan applies to all European covered bonds that meet "certain criteria", according to the ministry, which cited an EU commission proposal.
"It comes as a surprise and shows that the lobbying works", Joost Beaumont, a fixed income strategist at ABN Amro Bank NV in Amsterdam, said. "The process clearly shows that covered bonds are important to European banks."
Denmark’s drive to shape EU liquidity requirements leaves the region with rules that "are clearly against Basel, but on the other hand Basel rules aren’t binding", Jesper Rangvid, a professor of finance at Copenhagen Business School, said. "The US largely ignored implementing Basel II much to the dismay of Europeans, but it didn’t have any practical implications."
The Danish government is continuing its efforts to lobby other European Union members to ensure the commission’s proposal is passed, it said. Doing so will help "ensure that Danish mortgage bonds are treated appropriately, also in the final rules", the ministry said.
Basel III rules had reserved the top liquidity status for bonds sold by governments, even those bailed out during Europe’s debt crisis. The so-called Level 1 designation allowed banks to hold unlimited stores of sovereign debt at market value.