Covered bonds in Denmark:
Main contents in current legislation
August 2007
The Association of Danish Mortgage Banks
Issuers of bonds secured by real
property
Issuer
Prior to 1 July 2007
After 1 July 2007
Mortgage banks
Mortgage bonds –
Realkreditobligationer
(RO)
•
•
Commercial banks
No access
•
Mortgage bonds (RO)
Covered mortgage
bonds (SDRO)
Covered bonds (SDO)
•
Covered bonds (SDO)
Differences between SDO, SDRO and
RO (1)
Differences
SDO
SDRO
RO
CRD1) compliant
Yes
Yes
No2)
10 per cent.
10 per cent.
20 per cent3).
Risk weight under the
standardised approach
Assets eligible as the
basis for bond issuance4)



Loans secured by real
estate
Exposures to public
authorities
Exposures to credit
institutions
Continuous compliance
with LTV requirement


Yes
Loans secured by real
estate
Exposures to public
authorities


Yes
1) CRD – Directive 2006/48/EC definition of covered bonds
2) Does not comply with CRD demand for continuously compliance with LTV requirements
3) Mortgage bonds issued before 1 January 2008 will maintain the low risk weight of 0.1 percent in the entire duration of the bonds.
4) Commercial banks are also allowed to apply ship’s mortgages.
Loans secured by real
estate
Exposures to public
authorities
No
Differences between SDO, SDRO and
RO (2)
Differences
SDO
SDRO
RO
Access to issuance of
“junior covered bonds1)
Yes
Yes
No
Yes – for residential real
estate up to 70 per cent
(752) ) of LTV
Yes – for residential real
estate up to 70 per cent
(752) ) of LTV
No
Only this principle
Only this principle
Also other principles
Optional for every capital
centre
Optional for every capital
centre
Optional for every capital
centre
Unlimited instalment
freedom and lending
period
Market value
Balance principle (general
or specific)
1) Technically not covered bonds. Risk weight in the standardised method in Directive 2006/48/EC is 20 per cent.
2) As of 1 July 2009
Maximum lending limits
Property category
RO
SDRO/SDO (market value)
Owner-occupied homes for all-year
habitation
80 per cent. (market value)
80 per cent.
Weekend cottages
60 per cent. (market value)
60 per cent.
Private rental properties
80 per cent. (market value)
80 per cent.
Private co-operative homes
(unsubsidised)
80 per cent. (market value)
80 per cent.
Private co-operative homes
(subsidised)
80 per cent. (acquisition price)
80 per cent.
Non profit housing projects
80 per cent. (acquisition price)
80 per cent.
80 per cent. (reacquisition price)
80 per cent.
Agricultural properties etc.
70 per cent. (market value)
70 per cent. *
Office and shop premises
60 per cent. (market value)
70 per cent. *
60 per cent. (reacquisition price)
70 per cent. *
Properties for social, cultural, and
educational purposes
Manufacturing and manual industries
* Without additional collateral the LTV-limit is 60 per cent.
Balance principle (1)
Types of risk
Balance principle prior to
1 July 2007
Specific balance principle
after 1 July 20071)
General balance principle
after 1 July 20071)
(largely identical to balanceprinciple in force until 1 July 2007)
Stress test on level and structure
+
Loss limit of 1 per cent of capital base
+
Risks in different currencies cannot be
set off
Stress test on level and structure
+
Loss limit of 1 per cent of capital base
+
Risks in different currencies cannot be
set off
Stress test on level and structure
Loss limit for mortgage banks:2)
dependent of stress test:
1 per cent/ 5 per cent of capital
adequacy requirement +
2 per cent/10 per cent of the additional
excess cover
Currency risk
Exchange rate indicator 2 (few
currencies)
+
Loss limit of 0.1 per cent of capital
base
Exchange rate indicator 2 (few
currencies)
+
Loss limit of 0.1 per cent of capital
base
Simple stress test
Loss limit for mortgage banks:2)
10 pct. of capital adequacy
requirement +
10 per cent of the additional excess
cover
for EUR and 1 per cent of capital
adequacy requirement + 1 per cent of
additional excess cover
of other currencies
Option risk
Maximum term of 4 year
+
Structural limits on call options and
index-linking
Maximum term of 4 year
+
Structural limits on call options and
index-linking
Stress test on volatility
Loss limit for mortgage banks:2)
0,5 per cent of capital adequacy
requirement +
1 per cent of the additional excess
cover
No maturity or structural limits
Interest rate risk
1) Issuer may after 1 July 2007 choose between compliance of specific or general balance principle
2) There have been laid down different loss limits for mortgage banks, commercial bank and a ship financing institution
Balance principle (2)
Types of risk
Balance principle prior to
1 July 2007
Specific balance principle
after 1 July 2007
General balance principle
after 1 July 2007
Liquidity risk
Limitations on temporarily liquidity
deficits
25 per cent (years 1-3)
50 per cent (years 4-10)
100 per cent (from year 11)
Limitations on temporarily liquidity
deficits
25 per cent (years 1-3)
50 per cent (years 4-10)
100 per cent (from year 11)
Limitations on interest payments:
Interest (in) > Interest (out) (over a
current period of 12 months)
+
Present value
PV (in) > PV (out) (always)
Repayment of loans by
bonds other than the
underlying bonds
Maximum 2 per cent
Both own issued bonds and bonds
from other credit institutions
+
Approximately same cash flow
Max. 15 pct.
Both own issued bonds and bonds
from other credit institutions
+
Approximately same cash flow
Max. 15% from other credit institutions
- Own issued bonds unlimited
Liability conditions in case of
insolvency of a mortgage bank
SDO/SDRO/RO-investor demand:
1. Assets in capital centre including legally determined excess cover
2. Voluntarily additional excess cover
3. Preferential claim against the ordinary assets available for distribution
Derivative – counterparties demands:
Rank pari passu with bondholders in capital centres
“Junior Covered Bonds” – investor demand:
Secondary secured claims against the funds of a capital centre and an
unsecured claim against the ordinary assets available for distribution