Irish minister rejects senator’s call for Danish model

An Irish Senator’s call to establish a new covered bond system incorporating the Danish balance principle has been rejected by the country’s Minister of Finance, who said he is “very supportive” of the country’s existing covered bond framework.

The Mortgage Credit (Loans & Bonds) Bill 2012 was sponsored by Senator Seán Barrett — a senior economics lecturer at Trinity College and an independent Senator for the University of Dublin constituency — and was presented last Thursday (11 October) and discussed by Minister of Finance Michael Noonan yesterday (Wednesday).

Minister of Finance Michael Noonan

The bill aimed to “create and regulate a mortgage credit loans and bonds system, for the purposes of the orderly operation of the market for mortgages, such that economic activity is encouraged and property is improved via a system of mortgage-credit loans and mortgage-credit bonds”.

According to Barrett the balance principle in operation in Denmark should serve as a model for the mortgage system in Ireland, which is being hampered by concerns about mortgage arrears and recession-reduced household disposable incomes and their impact on banks’ lending decisions.

The bill was a private members bill, meaning that it was not sponsored by the government and historically bills of this type have not typically become legislation.

Speaking in the Senate yesterday Minister of Finance Noonan welcomed the bill as a contribution to the debate about the challenges facing the Irish banking system, but said that he could not accept the bill as proposed by the Senator.

He acknowledged that the market for mortgage credit is “sub-optimal” at the moment, but said that the Danish model could not be readily transposed to Ireland, and adopting it would involve many risks.

As part of restructuring Ireland’s banking system the government is downsizing financial institutions to a more sustainable level, he said, and restoring a more traditional funding model that largely comprises customer deposits.

He addressed the role that wholesale funding can play in the Irish banking system, noting that this type of funding can help banks better align the long term nature of their lending with that of their funding.

“Indeed it is for this reason that this Government is very supportive of the covered bond structure we have in place in this country,” he said, “which has proven to be a robust and valued framework by international investors.”

He set out several reasons for rejecting Barrett’s bill, noting, for example, that it, in conjunction with central bank regulations, could conflict with personal insolvency legislation and the Irish approach to repossession resulting from mortgage arrears.

In addition, it would not be appropriate to introduce new lending and banking practices before the legislative process on the Capital Requirements Directive and Regulation (CRDIV) has been finalised, he said, noting that there have been concerns about the treatment of Danish covered bonds under this legal framework.

The minister said that he accepted many of the principles behind Barrett’s bill and the spirit in which it was proposed, but that the government had to reject it. It will, however, look into whether certain proposals contained in the bill could be feasibly rolled out as the financial system returns to a more sustainable level.

A review of Ireland’s asset covered securities (ACS) legislation is due next year.