The traditional Danish mortgage model in the aftermath of the financial crisis (Traditional Danish Mortgage)
The financial crisis has underscored the importance of new and better international regulation of banks and other financial businesses. For that reason, the European Commision is currently considering a new directive based on the so-called Basel III rules for regulating banks. The new rules will require banks to meet a liquidity demand, meaning that they have to hold a portfolio of highly liquidable assets that can function as reserve capital in times of crisis. A highly liquidable asset is understood as an asset that can always be sold easily ofr a fair price. The problem from a Danish perspectiv is that only treasuries are seen as higly liquidable assets. I Danish banks mortgage bonds has thus far been used as liquidity reserve. The new rules will ultimately make it less attractive for Danish financial institutions to hold mortgage bonds, which in turn will lead to lower prices of bonds and higher interest rates on mortgage loans.
The National Bank and Finanstilsynet have both argued that mortgage bonds should also be regarded as higly liquidable assets. My project will investigate whether Danish mortgage bonds in reality are higly liquidable or not, and based on that if they could be part of the liquidity reserve. Simultaneously I will test whether the initiatives taken under the financial crisis by the government and the National Bank, for example stimulus packages, aided financial institutions by keeping mortgage bonds liquidable during the crisis.
Forsknings- og Innovationsstyrelsen FRIFORSK