Danes laud leaked Commission paper with covered in Level 1

May 16th, 2014

A leaked document by European Commission staff circulating this week confirms statements from two Danish ministries last Friday that certain large, highly rated covered bonds will be eligible as Level 1 assets for Liquidity Coverage Ratio purposes, albeit with an overall cap of 70% and a haircut of 7%.AppMargrethe Vestager_1

According to the document from DG Markt staff – which also indicates that Level 2 criteria will be less stringent than proposed under the Basel III framework – covered bonds that are CRD/CRR-compliant, are rated at least AA-, and have a minimum size of Eu500m or equivalent will be Level 1-eligible under the new plan. Mandatory overcollateralisation levels and maximum LTV requirements are also cited.

The document states that it reflects the preliminary views of DG Markt and is not a draft delegated act.

The Danish Minister for Economic Affairs and the Interior nevertheless described the move as “a big step forward” last Friday when most of the details of the document were released in a joint press release from the Ministry of Economic Affairs and the Ministry of Business & Growth.

“I am satisfied the Commission has listened to our good arguments, in particular that Danish mortgage credit bonds will be classified in the highest liquidity category and are in principle recognised to be as liquid as sovereign bonds, “ said Margrethe Vestager, Minister for Economic Affairs and the Interior. “That is a big step forward.

“Now my focus is to ensure that the principles in the draft also finds its way into the final rules. The Government has worked intensely on this issue and we will carry it forward to completion, so that the Commission’s draft will also become the final rules.”

The Danish ministries noted that the proposal has still to be settled upon by the Commission and that it can be rejected by the Council and Parliament.

The 70% cap is an overall cap combining those covered bonds that are eligible as Level 1 assets and other covered bonds that are included as Level 2A assets. The 70% cap is nevertheless higher than the 40% cap covered bonds would face under the Basel III framework as only Level 2A assets. A proposed 7% haircut for covered bonds that qualify as Level 1 assets is also lower than the 15% haircut they would face as Level 2A assets under Basel III.

The proposal suggests a better result for covered bonds than discussed earlier last week and would be in line with what Karsten Beltoft, director of the Danish Mortgage Bankers’ Federation had described as “Level 1B”. An outcome whereby the cap on covered bonds would have been increase from 40% to 60%, but the asset class left in 2A, had been characterised as “Level 2A+”.

Henrik Sass Larsen, Minister for Business and Growth, highlighted how the result outlined in the Commission document would safeguard the Danish mortgage system.

“The Government has a major focus on ensuring the best framework conditions for the well-functioning Danish mortgage credit system,” he said. “If the final rules follow the draft, Danish institutions will be able to continue to hold significant amounts of mortgage credit bonds avoiding increasing interest rates and ensuring the stability of the Danish housing market for Danish home owners.”

Meanwhile, covered bonds eligible in a position broadly consistent with Level 2A of the Basel framework could be rated as low as A-, rather than AA- as laid down by the Basel Committee on Banking Supervision. The size limit for this is lower than for Level 1B, at Eu250m. Level 2A covered bonds would still be subject to a 40% limit and 15% haircut as under the Basel proposals.


See Crédit Agricole CIB analysis here for more.

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