IMF recognises Danish moves, but calls for more

A drop in confidence in Danish covered bonds was one of four downside risks highlighted by the International Monetary Fund (IMF) upon the conclusion of its latest report on the Danish economy last week, although the supranational body acknowledged progress being made by the authorities in tackling the area.

Although the likelihood of Denmark experiencing such an event occurring was considered low and the lowest among the risks highlighted in the report, its impact if it materialised was seen as the highest.

The IMF (pictured) acknowledged that financial stability risks in Denmark are “contained”, noting several steps the authorities have taken since the onset of the financial crisis, including, among other measures, recent legislation requiring the maturity extension of covered bonds in stress situations with the aim of reducing refinancing risk in the mortgage finance system. The new Danish supervisory diamond for mortgage credit institutions was also noted.

However, the IMF said that while such policy actions have helped safeguard financial stability, the large size and high domestic interconnectedness of the financial system require even greater resilience, and made several recommendations.

“To mitigate risks introduced by recent product innovation, use regulatory policies to encourage longer bond maturities, ensure that interest-rate risk is better reflected in loan pricing and approvals, and increase buffers in loans with interest-only periods, for example, by reducing the loan-to-value ceiling,” it said. “The proposal for a supervisory diamond for mortgage credit institutions goes in the right direction.”

Moody’s said on Monday that implementation of the IMF’s recommendations would be credit positive for Danish mortgage credit institutions and covered bonds because they address vulnerabilities in the mortgage market.