Regulation: Danish central bank talks tough on Basle III and European banking union

By:
Duncan Kerr
Published on:

Basle III proposals would hurt Danish banks; Denmark wants equal treatment in bank union

Nils Bernstein, chairman of the board of governors of Danmarks Nationalbank
Nils Bernstein, chairman of the board of governors of Danmarks Nationalbank


The Danish central bank is not the most powerful among its international peers, but when its banking sector is potentially placed at a disadvantage, Danmarks Nationalbank will fight its corner with vigour.

Top of its hit list are specific proposals under Basle III and plans for a European banking union, which together could pose challenges for Danish banks, its $480 billion mortgage market and the country more broadly.

For Nils Bernstein, chairman of the board of governors of Danmarks Nationalbank, the Basle III proposals on the liquidity coverage ratio (LCR) and redefining trading assets are cause for concern.

The LCR under Basle III requires banks to have enough cash and easy-to-sell assets to survive a 30-day market crisis.

The Basle Committee on Banking Supervision, which drafts the Basle rules, is deeply divided about what should count as liquid assets beyond cash, sovereigns and high-rated corporate bonds. If Danish mortgage bonds are not classified as liquid assets, it could potentially force Danish banks to dump them, causing chaos in the world’s third-largest mortgage bond market, after the US and Germany.

Just as liquid

"On the one hand, our government debt is not that high, therefore if we follow the Basle proposal there would be some shortage of government bonds," Bernstein tells Euromoney in an exclusive interview in Copenhagen. "In addition, banks use mortgage bonds in their liquidity holdings and that will be a limited possibility under the proposed LCR definition.

"We have raised the subject in Basle and provided some analysis, which shows that during the crisis our mortgage bonds have been as liquid as our government bonds. So there is no reason why banks shouldn’t be able to use mortgage bonds to support their liquidity positions. We have been arguing this for some time, and have received some sort of understanding but we will have to see how it turns out."

He adds: "Since the Basle committee launched its proposals, we have had the sovereign debt crisis and a lot of the sovereign debt has been downgraded, so there should be some room now for some sort of reconsideration. We have a lot of sympathy for banks having sufficient liquidity in all circumstances, but in our opinion Danish mortgage bonds are good paper for that."

The other issue of equal concern, is the committee’s proposal to shift all mark-to-market assets to trading books, which would force Danish banks to reclassify home loans as traded assets, even though they are not resold.

"The consequences for mortgage banks of moving mortgage loans to the trading book would be significant, and would imply an increase of up to four or five times in risk weights, which would be very expensive," says Bernstein. "We don’t see that reflecting the actual credit risk in Danish mortgage loans."

On the European Union’s plans for a banking union, Bernstein sees dangers for Danish banks being left on the outside but he is also concerned about a union dominated by the eurozone countries.

"It makes sense that big, international cross-border banks are subject to some sort of centralized supervision," he says. "If the outcome is a stronger European banking system, it would be detrimental for the Danish banks to be outside, so therefore we have encouraged the government to actively engage in these negotiations."

Eurozone upper hand

However, Bernstein adds: "One of the problems is that it seems that the euro-area countries are given some sort of upper hand in this, in so far as the countries outside the euro area can opt in but not on the same conditions as far as voting is concerned.

"All non-eurozone countries are very observant of this and therefore it is fundamental that there should be no discrimination in the final outcome. We will have to see what the outcome will be for us. Indeed, we may need to ask whether it will be politically possible for us to be a part of this union if there is no equal treatment."

This is fighting talk.

Eurozone policymakers are trying to convince investors they will make speedy progress on banking union. Bernstein is not sure. "Is [it] really possible to have all 6,000 European banks in this scheme?" he says. "There is a risk of bureaucratic build-up, and on a day-to-day basis you have to ask how this will work. At the very least, we should start with the big, cross-border banks being supervised and then we should see whether it would be beneficial or not to include more banks."

He adds: "The timetable for this to be decided is before Christmas but I don’t see that as realistic. It is very complicated and one should give oneself enough time to look into these matters very carefully. In addition to supervision, there are other questions around how the proposed deposit guarantee and resolution scheme will fit into this."