Finansiel regulering: Et studie af CRD IV samt SIFI reguleringens påvirkning på dansk realkredit

Simon Weileby Lütscher

Student thesis: Master thesis


This master’s thesis evaluates the possible consequences for the Danish mortgage system from new regulatory framework from the European Union and the Danish government. All financial institutions in Europe have to implement the EU “Capital Requirement Directive IV”, called the CRD IV. This directive states the level and quality of capital an institution must hold in their capital reserves as well as the regulation of high quality liquidity assets an institu-tion must hold in its liquidity reserve. Furthermore the Danish government is planning to sup-plement this with further regulation through regulation for Systematically Important Financial Institutions (SIFI). The Danish mortgage system is unique in Europe and has a large role as the prime supplier of liquidity assets for financial institutions in Denmark, who primarily holds covered bonds due to a shortage of government bonds. Because of the shortage more than 2/3 loans in Denmark are mortgage loans. The system faces severe consequences from the CRD IV regulation trough a possibility of higher financial costs as well as a large shortfall of high liquidity assets in Den-mark, if Danish covered bonds are not classified as Level 1 assets. Furthermore the most popu-lar loan-type, F1, faces extinction. Through thorough research on potential effects of the Danish mortgage system, this report has concluded the following: The cost of capital for mortgage banks will increase as a result of the capital- and liquidity re-quirements. This will result in an increase of contribution rates which increases the cost of lending. Due to match funding principle in the Danish mortgage system a reduction in equity costs from lower required rate of returns will only benefit lenders through lower interest on mortgage loans. The institution only profits directly from a contribution rate which will in-crease with higher capital requirements and result in higher a demand on earnings for the institutions. Lenders have already experienced increased contribution rates from institutions. The increase in cost of capital will primarily be in the implementation period, where the mort-gage banks have to increase its capital and equity reserves. After implementation is only ex-pected a small increase in cost of capital and therefore on the future GDP growth. The margin-al benefits from the SIFI regulation are estimated to be low hence it is recommended not to implement this regulation in the near future for mortgage banks in Denmark. Due to the introduction of NSFR, the dominating mortgage bond F1, will probably be faced out or become too expensive for lenders to finace. However new products will be introduced to the market with a longer refinancing period but still with a variable interest rate. Danish mortgage bonds will presumably be qualified as high liquid assets, L1, which was the biggest concern in Denmark. So the threatening shortfall in Danish high liquidity assets seems to be cancelled – if however the European Comission implements the initiative before regula-tion is adopted. My final conclusion is that the Danish mortgage system – due to its fundamental characteris-tics – does not necessarily need further regulation. Not even a single institute has gone bank-rupted in its more than 200 year old history. On the positive side, the regulation will reduce the refinancing risk which is considered to be the most real risk in the Danish mortgage sys-tem. In conclusion the financing costs will increase primarily in the implementation period and hence reduce lending growth to some extent. But nevertheless increased capital and liquidity requirements will have a positive effect on the security of the financial system and reduce the likeliness of bankruptcy costs and high losses for society.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2013
Number of pages147