Danish variable interest real estate mortgage bonds dying.
The key is the commitment to the Basel III regulations:
Core capital should be 4½% of the risk weighted assets. Core capital is equity plus guaranteed loans without maturity – i.e. is never paid back unless the bank wants to. For systemic vital banks there is a further (up to 3 %) demand for core capital.
The big technical problem is how the risk weighted assets should be counted. Sovereign bonds are 100% deductible from risk weighted assets f.i.
The European Parliament (one former Danish EU-commissioner called it a Mickey Mouse Parliament – caught a lot of flak for that one) has left the precise formulation to the ECB and its CEO Mario Draghi.
What killed the Danish variable interest real estate bond?
- According to the Danish daily paper Børsen: Own issues are limited to 40% of risk weighted assets.
- Variable interest bonds count to 85% as a risk weighted asset.
- 30 year loans financed with annual issue of bonds must be covered with 165% issued bonds.
We are talking what forensic medicine calls competing causes of death – any which one is fatal.
The Danish banks – and their mortgage banks – had hoped the European Parliament would be there for them. They were indeed! They raised the core capital requirement after British demand – allowing each country latitude in increasing the requirements for coverage.
Until the very last moment the Danish banks had hope for the Basel III requirements to be turned down – or at least watered down – that didn’t happen. The Danish Central Bank has repeatedly warned that it would be extremely unlikely that would happen. Of course the Danish CB has taken its precautions.
There are about 250 bio. DKK variable interest rate Danish bonds “abroad”. Of these 55-60 bio. are deposited as collateral in the Danish CB (40 of these in the ECB with Danish CB guarantee) for 3 year loans.
The remnant approximately 200 bio. are covered by cash in the Danish currency reserve. Funny with that figure – 250 bio. It is quite close to the loans issued by the Danish CB during 2009/10 using bonds as collateral. That is: The situation of the Danish banks and mortgage banks has in no form, shape or way improved these last two years. The main object is clearly to keep the Danish real estate mortgage away from destabilizing the Danish krone.
The real trouble comes as a consequence of this: The homeowners on flexible interest have abundantly shown that have neither the inclination nor the ability to service their loans. At the moment these debtors are not paying principal (can been deferred up to 10 years) nor interest (3/4% annually plus and administration fee of approximately same size). The lending to house owners just grow and grow – and as there are no home sales to speak of home owners get deeper and deeper in debt.
As home sales to realistic prices are extremely difficult to finance and demand is low anyhow real estate price are – if not downright dropping (sales figures for Q1 2012 not available yet – the truth is too terrible) – then in the doldrums. The homeowners most in debt are the ones that are the most insolvent.
Denmark has no “jingle-mail” solution. Higher interest rates were tested in 2009 with so spectacularly disastrous prognosis, that the only thing gained was the insight, that it is flatly impossible.
With these new regulations – to be enforced from next year – it is very hard to imagine a future – for the banks – that is.
But none of this will be a surprise to regular readers.