Interview: Ane Arnth Jensen, Realkreditrådet

Ane Arnth Jensen, managing director of the Association of Danish Mortgage Banks (Realkreditrådet), spoke to Nordic FIs & Covered about regulatory issues that could impact Denmark’s system.

Discussions are underway regarding SIFIs in Denmark. Are any aspects of what is on the table of concern to the Association?

Ane Arnth Jensen

We are very much aware that the capital requirement for SIFIs must of course be higher than for other banks — that’s natural. But we do not want Danish legislation to be tighter and to move faster than other EU countries.

We have already faced quite massive increases in capital requirements due to CRD IV/CRR and these new capital requirements are really harsh — it has been necessary for us to increase the margins on mortgage loans, and so on. The Danish mortgage banks are very well capitalised, and therefore we don’t see any need to have above average or extra strengthening of the capital requirements in Denmark compared with other countries when it comes to SIFIs. Of course the capital requirements should be higher, I repeat, but not above average when compared with other European countries. That’s one aspect what we are actually interested in.

And we don’t think it would be wise to implement the rules faster than in other European countries. Let me give you an example: it was decided in CRD IV/CRR that regarding the Net Stable Funding Ratio (NSFR) there should be some investigations by the European Banking Authority and after that there will be a new political process in the EU whereby the Parliament, Council of Ministers and the Commission will discuss it further in 2015/2016, and then it might be operational from 2018 — but a report in Denmark by the SIFI committee in March recommended that the NSFR be introduced from 2014. We don’t see any use in implementing a rule before we know exactly how it will be implemented in other European countries. We should stick to the process that has been decided upon in the European Union and not make our own rule in 2014.

Why are we so interested in this area? The reason is that if the NSFR is implemented as in the Basel proposals, it will be harmful to our ARM loans, and we don’t think that the Basel definition is the right way to define the NSFR. Therefore we want to follow the process in the EBA and afterwards the political process in the EU to make sure that we have some influence in this area, and that we do not run faster than the other countries. That’s just one example of we are worried about.

Progress towards an EU Banking Union is also being made. Do you have any concerns about this process?

Of course we are not against Danish participation in a Banking Union. The Danish government and the Danish parliament have not yet decided if Denmark should join or not. The Danish government has said that we will have to wait until the final decisions about both deposit insurance and crisis management are well in place so that they are able to make a complete judgement. Then the Danish parliament will decide upon this issue.

Our interpretation of the Banking Union is that we are now moving very fast towards a single rule-book principle, so to speak, and in that context the ECB will get the power to interpret financial regulation within the union. Here we are not only speaking of supervisory tasks, but about interpretation of the rules, too, because you cannot separate those two things, and they will have this right to interpret financial legislation. There is then a reallocation of power from the political sphere to the authorities.

The Danish mortgage system has proven to be a large success throughout the crisis because we have been able to fund all our loans and have had a very marked increase in the outstanding amount of bonds, by Dkr320bn (Eu43bn) from September 2008 to an outstanding amount of about Dkr2,500bn. But if we have a Banking Union — with new legislation and new rules being very quickly implemented and with less political influence — in that new architecture for decision-making there might be some new rules that could harm our system. And therefore we recommend that if the Danish parliament should vote pro participate in the Banking Union that there should be at the same time a kind of guarantee or a shield for the Danish mortgage model, a shield that makes sure that our system is not harmed or destroyed in any way. That’s what we are very concerned about.

I can see how that could be a fear given how unique the system is.

We are 27 members in the EU — and very soon we will be 28 — but the financial systems and the systems of real estate finance are really different. It’s not that our Danish system is one island and then you have 26 other countries which form the same… The British system for financing real estate differs markedly from the French and from the German.

But there is a key difference, which is that many other systems are actually based on a banking framework where real estate finance is part of the banking system, and that’s why we often have some challenges in Denmark, because when you start up new legislation in the EU you start with thinking of a banking structure, with deposits, etc, and we have specialised mortgage banks and no deposits at all. So that’s why we often get into problems when it comes to European legislation.

That’s clear from things like the asset encumbrance debate.

That’s a very good example, because much of what is said doesn’t make sense in relation to Denmark even if it makes some sense for other kinds of systems. And now we have this EBA consultation and the authorities implementing part of the legislation, and in this area things are moving very quickly, with the authorities having the power. That’s why we think there is a risk in this new legislative environment that some new rules may be introduced — as in this encumbrance interpretation or other rules — that could harm the Danish system very severely, and that is why we are very engaged in this subject.

When it comes to CRD IV in general I expect you are satisfied with the outcome so far. But do you have ongoing concerns given that there is work to be done by the EBA, for example?

Yes, that is another example.

Of course we are satisfied so far with the CRD IV/CRR because the European Commission actually listened and found out that the Danish system is very unique and has a lot of advantages that should not be spoiled by new legislation. Regarding the LCR definition, we are really satisfied with the outcome of the CRD IV/CRR. But to compare it with a football game, it’s only the first part of the game that we have won. There is the second part now to come, and we have to make sure that Danish covered bonds again fulfil the requirements of the EBA definition or interpretation of the LCR and the nine criteria.

And next in line is the definition of the NSFR — as I mentioned before — because we have to wait for the EBA to draft their proposal for the European Commission, the Parliament and Council of Ministers when they have to discuss this in 2015/2016, and in this area this definition of the NSFR is of high importance for the Danish mortgage system as well.

So the CRD IV is there and it looks good so far, but we are certainly not home and dry. And these two areas are of high importance for the Danish mortgage system.

I would add that the quite massive increase in capital requirements is a part of a debate in Denmark at present, because the borrowers do not really accept the increase in margins. But actually there is only one rationale for that — it is due to the higher capital requirements and there is a bill to be paid, and it’s only the borrowers that can pay for this bill. And it is the same situation all over Europe because the CRD IV counts for something like 8000 credit institutions throughout Europe. We are all in the same boat.

But it is a big challenge because people, the press, they really don’t accept that there is this massive increase in capital requirements — even though we have the cheapest system for funding mortgages with the lowest margins if you compare it with other countries. So we have a very good case, but it is a big task for us to make sure we explain this to people because they are critical when they receive a higher bill.

What are your concerns over the proposed Financial Transactions Tax?

The Danish government and the Danish parliament are against the FTT. We have nevertheless warned that if we do join the FTT it will be costly for Danish mortgage borrowers because we have to buy bonds if someone wants to prepay their old loan, then you have a new loan and you have to sell bonds, and these transactions will be hurt by the tax.

But what is more problematic is that we will be hurt if some countries proceed with the FTT even if Denmark does not, because if there are transactions with investors from those countries that could still hit Danish mortgage bonds. That’s why we have argued that if these countries go ahead with the FTT we should make sure that the Danish mortgage bonds are not hurt, but it’s really a difficult task.