UPDATE 1-Danish wisemen play down Basel III mortgage mkt risks

* Wisemen: variable rate house loans source of instability

* Wisemen: Denmark can do without variable rate house loans


(Adds economist, mortgage lenders association comments)

By Anna Ringstrom

COPENHAGEN, June 3 (BestGrowthStock) – Economists on Thursday played
down the risk to Denmark’s large mortgage bond market, and
thereby the economy, from proposed Basel III banking reforms.

Denmark’s independent Economic Council, also known as the
“wise men”, said planned international regulations to strengthen
the banking sector would effectively make Danish short
adjustable rate mortgage loans more expensive.

But they also said that such bonds are a source of
instability and the country can do without them.

That jars with messages from the government, the banking
sector and the central bank that the new regulation may
undermine the entire Danish mortgage lending system.

The Danish mortgage market — the third-biggest by value
after the U.S. and German — accounts for two thirds of the
total Danish bond market.

Coupons on adjustable rate loans are reset every year or up
to every five years.

“These loans can in their current form hardly be seen as
necessary for Danish financing of home buying,” the wisemen said
in a twice-yearly report on the Danish economy.

No Danish mortgage bank has defaulted on its payments since
the system was created in 1795, and many in Denmark want the
country’s mortgage bonds to be seen as fully liquid assets on
par with government bonds.

“Because the short adjustable rate mortgage loans can add to
macroeconomic instability, it would not necessarily be bad for
the Danish economy if households were in reality forced to
exchange part of the very short adjustable rate mortgage loans
for more stable, possibly fixed-rate loans,” the wisemen said.

The Basel III proposals would limit financial institutions’
use of mortgage bonds as liquidity instruments, which many say
would harm Denmark’s home loan system based on such bonds.

The market value of Danish mortgage bonds is about 2.3
trillion crowns ($416 billion), or 1.4 times Denmark’s GDP.

Under the Basel III proposal, expected to become effective
end-2012, corporate and mortgage bonds would not be allowed to
exceed 50 percent of a bank’s liquid assets and could only be
included at up to 60-80 percent of market value.

That could force Danish financial institutions to shift
large parts of their liquidity portfolios out of mortgage bonds
and into government securities.

Danish households and businesses have 1.13 trillion crowns
worth of adjustable-rate mortgage loans, the association of
Danish mortgage lenders said in a statement.

“The wisemen argue that the adjustable-rate loans are
financially unstable because the interest rate may rise. But if
the adjustable-rate loans are abolished there will be new types
of loans with variable rates,” the association said.

These new types of loans could be expected to cost at least
0.5 percent more than the existing, increasing Danes’ borrowing
costs by 5.6 billion crowns or more annually, it said.

Nordea chief economist Helge Pedersen said borrowing costs
would probably rise by 6.2 billion crowns per year, equal to
3,692 crowns per house, if households were left to fixed-rate

“Scrapping variable rate loans overnight would thus be a
hard blow to Danish home owners and the Danish economy,” he said
in a note to clients.

Investing Analysis

(Editing by Ron Askew)

UPDATE 1-Danish wisemen play down Basel III mortgage mkt risks