DLR is regulated by the Danish Financial Business Act.
The act provides rules governing all financial institutions in Denmark, regarding financial accounts, ownership, management, capital adequacy requirements, etc.
Furthermore, DLR Kredit is subject to the Danish Mortgage-Credit Loans and Mortgage-Credit Bonds, etc., Act, as well as the corresponding executive orders promulgated by the Ministry of Business and Growth and the Danish Financial Services Authority (Danish FSA). The act, with its corresponding executive orders, establishes a detailed set of rules for mortgage banks’ activities, including provisions on valuation and fixing of lending limits.
The Danish FSA supervises all Danish mortgage banks and financial institutions, which must regularly submit reports on capital adequacy, financial risks, and credit risk. The Danish FSA frequently makes inspection visits in mortgage banks and financial institutions.
Legislation Addressing Refinancing Risk
To address the refinancing risk connected with the issuance of bonds where the term of the underlying loan is longer than the maturity of the bond used to fund it, the Danish Parliament on 19 March 2014 adopted changes to the act on mortgage-credit bonds, etc. and to the Danish Financial Business Act.
The implementation date of the new act was 1 April 2014 for bonds with an original maturity of up to and including 12 months. For bonds with an original maturity of more than 12 months, the implementation date was 1 January 2015.
The legal change imposes regulation in case interest rates suddenly rise very sharply (+ 5 percentage points) at the refinancing of bonds with a maturity up to and including 2 years (interest rate trigger), and in an extreme crisis where a mortgage bank is unable to complete the refinancing by the sale of bonds at market terms (failed refinancing). In both cases, the solution is based on the maturity extension of the existing bonds.
Finally, the new legislation has provided clarity over the position of bonds and loans where the terms of the loans are longer than the maturity of the underlying bonds if a mortgage bank is under resolution.
Due to the legislation, DLR has opened 1Y and 2Y ARM bullet bond series with an “IT” designation (interest trigger), and 3Y-5Y ARM bullet bond series which since 2015 has had an “RF” designation (refinancing failed). CIBOR/CITA linked bonds financing DLR’s ARM Short Loans issued after 1 July 2014 are equally comprised of statutory maturity extension in case of failed refinancing.
The interest rate triggers on the DLR ISINs comprised by the legislation will be announced on DLR’s website before the refinancing auctions.
The Danish mortgage banks have jointly prepared an overview of the new Danish Covered Bond Legislation addressing refinancing risk:
The Balance Principle
Underpinning the connection between lending and financing, the balance principle is a cornerstone of the Danish mortgage credit model.
The balance principle sets a limit to the financial risk taking of DLR and its mortgage credit peers. In practice, there is a close link between loans granted and bonds issued.
Over the years, the balance principle has evolved and been brought up to date. The most recent significant change took place in 2007 when the Danish parliament passed the Danish Covered Bonds Act.
DLR is subject to a range of capital requirements that contribute to ensuring capital adequacy. These capital requirements create a long-term foundation for running a sound mortgage credit business that can sell bonds on competitive terms.
Read more about the current capital requirement rules and the most recent changes to the rules at the website of the Danish Financial Supervisory Authority.
DLR as SIFI
DLR was designated a systemically important financial institution (SIFI) in Denmark on 24 June 2014.
SIFI designation requires that at least one of the following parameters is met:
- The institution’s total assets make up more than 6.5% of Denmark’s GDP.
- The institution’s lending in Denmark makes up more than 5% of the total lending in Denmark by Danish banks and mortgage credit institutions.
- The institution’s deposits in Denmark make up more than 3% of the total deposits held by Danish banks in Denmark.
DLRs total assets as of Q2 2021 corresponds to 7.8% of Denmark’s GDP (2020), and consequently DLR qualifies as a SIFI institution. With such designation comes a special SIFI buffer requirement for DLR’s capital, which is based on an estimate of how systemically important DLR is. The requirement has been set at 1% of DLR’s total risk exposures and must be covered by CET1 capital.