Safeguarding investment in Danish mortgage bonds
| Pages | 59-69 |
| Published date | 01 January 1998 |
| DOI | https://doi.org/10.1108/eb024957 |
| Date | 01 January 1998 |
| Author | Jeppe Ladekarl |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Volume 6 Number 1
Safeguarding investment
in
Danish
mortgage bonds
Jeppe Ladekarl
Received:
15th
October,
1997
Danmarks Nationalbank, Havnegade 5, DK-1093 Copenhagen
K;
tel: +45 33 63 63 63; fax: +45 33 63
71 15; e-mail: jla@natbk.dk400.dk.
Jeppe Ladekarl
is an
Economist
at
Dan-
marks Nationalbank
in
Copenhagen.
He
joined
the
monetary policy department
of
the Bank
in
1995 coming from
the
Danish
ministry
of
housing and building. Presently
he occupies
a
position
as
head
of
section
in the financial markets department.
ABSTRACT
This paper considers some safeguard measures
protecting
the
investment
in
mortgage bonds
against credit
risk.1
The
outset
of
the discussion
is
the
200-year old Danish system
of
mortgage
credit where investor protection primarily
has
been achieved
by
ensuring
the
quality
of
the
mortgage credit institutions'
balance
sheets.
The
safeguard measures used focus
on the
relative
and
absolute
size of the capital
base
of the mort-
gage credit institutions and
the
minimisation
of
interest rate and
credit
risk borne
by
the institu-
tions. Important features
in
this respect are
the
so-called 'balance
principle', eliminating interest
rate
risk
from lending operations and maximum
loan-to-value rules. These measures combined
with
a
monopoly
on the
name 'mortgage
bond'
constitute the
backbone
of
the
system.
INTRODUCTION
The main
aim of
this paper
is to
give
a
brief introduction
to
some basic measures
safeguarding
the
stability
of a
mortgage
credit system, where
the
loanable funds
are
raised
by
issuing mortgage bonds.
The main emphasis will
be put on the
description
of
measures safeguarding
the
investment
in
mortgage bonds against
credit risk.
The
system is, therefore, predo-
minantly viewed from
the
perspective
of a
potential mortgage bond investor.
It
is
important
to
note that this investor
perspective
is not as
narrow
as one
would
tend
to
think.
In a
system where
the
cost
of mortgage loans
is
directly linked
to the
pricing
of
mortgage bonds
in the
market
the borrowing cost
is
reduced
if
the inves-
tor estimates
the
mortgage bonds
to be
safe
'gilt-edged' investments. Safeguarding
the
investor
is,
therefore,
one of
the prerequi-
sites
for
affordable housing
in a
bond-
funded mortgage credit system.
As
the
basis
for the
drawing
up of the
basic safeguard measures presented
in
this
paper
is the
Danish system
of
property
financing, the paper starts with
a
descrip-
tion
of the
main features
of the
Danish
mortgage market. Thereafter,
the
safeguard
measures provided
for in the
mortgage
credit
act are
introduced.
The
paper ends
with
a few
concluding remarks.
THE DANISH MORTGAGE MARKET
The history
of
the Danish mortgage credit
system dates back
to the big
fire
in
Copen-
hagen
in 1795
which resulted
in the
near
destruction
of
the city.
The
fire created
an
extraordinary demand
for
capital which
Journal
of
Financial Regulation
and Compliance, Vol. 6, No.
1,
1998, pp. 59-69
© Henry Stewart Publications,
1358-1988
Page 59
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