Danes fear FTT, call for mortgage bond exemption

The Association of Danish Mortgage Banks and the Danish central bank fear adverse effects on financial markets from an EU financial transaction tax (FTT), with the association focussing on perceived negative consequences for Danish mortgage bonds.

Danmark Nationalbank

The fears were raised in a submission to a consultation by the Danish ministry of taxation. Danmarks Nationalbank (pictured)said that a financial transaction tax would have adverse effects on financial markets and that Denmark’s capital markets would be affected even though the country is not participating in enhanced co-operation on the proposed tax.

The mortgage bank association (Realkreditrådet) said that although Denmark is not one of the 11 EU countries that will participate in enhanced co-operation on the tax, the country’s mortgage model could be affected because there is a risk that Danish mortgage bonds will be affected by a tax on sales of the bonds to investors in the countries that have signed up for enhanced co-operation.

Enhanced co-operation is a process whereby a group of at least nine EU Member States resolve to progress an initiative proposed by the European Commission (EC) once it has become clear that unanimous agreement would not be reached across the EU within a reasonable period of time.

Because of the matching principle underpinning all Danish mortgage lending a tax on the sale of mortgage bonds would be directly reflected in the price of mortgages, said the association.

Bonds issued to fund loans secured by real estate should be exempt from the proposed tax, it argued. If it is not possible to obtain an exemption for covered bonds then the definition of a primary market transaction, which is exempt from the proposed FTT directive, should be clarified to include the entire value chain that directly connects borrowers and investors under the Danish model, said the association.

“An exception or clarification of the scope will also help to ensure a ‘level playing field’ in relation to financial service providers that have access to other funding sources such as deposits, which are not subject to the FTT,” it said.

Its submission to the tax ministry noted that most day-to-day financial activities relevant for citizens and businesses, such as mortgage lending, are exempt from the financial transaction tax (FTT) proposal, but that there is insufficient clarity for it to be reassured that this will become a reality for all Danish mortgages.

Around 15% of Danish mortgage bonds issued by Denmark’s mortgage banks are owned by foreign investors, according to data cited by the association, although there is no immediate information available about the ownership interest of investors in countries covered by the enhanced co-operation on the FTT, but this includes larger holdings by investors in Germany, which will be subject to enhanced co-operation.