The Association of Danish Mortgage Banks (Realkreditrådet) is proposing a move to daily auctions to refinance adjustable rate mortgages as one of various options it is exploring in a bid to win better treatment for its system under Basel III when the new framework is implemented in the European Union through CRD IV.

The possibility of having “day-to-day” auctions was raised by Peter Engberg Jensen, chairman of the Association of Danish Mortgage Banks and Nykredit group chief executive, at its annual meeting at the end of last month.

“We are discussing such a proposal with the Danish Mortgage Banks’ Federation and public authorities,” he said, “with a view to implementing it in due time for us to demonstrate to the European authorities that we have a system with low liquidity risk which should fall within the Next Stable Funding Ratio under the Stable Funding rules.”

Danmarks Nationalbank

Currently, Danish issuers hold up to three covered bond auctions a year – in March, September and December, with the largest concentration being in December. The December sale issued 96% of Danish covered bonds until 2009, but the association agreed to further distribute refinancing auctions and to refinance new loans at other times of year after the Danish central bank, Danmarks Nationalbank, raised concerns over the reliance on a single auction.

“That moved quite a few bonds,” said Ane Arnth Jensen, managing director of the association, of the move away from having only the December auction. “That was a good first step.”

However, the central bank is understood to be keen on spreading the auctions even further.

“The Danish central bank has been against these very large auctions,” said Gustav Smidth, senior analyst at Danske Bank. “It tends to put the country’s finances at risk if an auction happens to come at a bad time for the market. So this is all a result of the crisis.

The Danish mortgage banks also believe that such a move would help their case with regard to the NSFR as well as Liquidity Coverage Ratios under Basel III. According to Henrik Hjortshøj-Nielsen, head of group treasury at Nykredit, a possible move to daily auctions is just one of three options being explored and prepared for.

Nykredit Realkredit, which has three auction dates, is reweighting its sales so that within the next two years the March, September and December auctions will be of equal size, and it is considering introducing a fourth auction. The mortgage bank has also prepared to bring its auction dates forward a month, because in order to satisfy the LCR institutions have to be financed 30 days forward.

“And if we do a refinancing on a daily basis, we would do refinancing on about 220-240 days,” said Hjortshøj-Nielsen, “and in that case we could only lose half a percent of our funding on one day. That’s much less than a retail bank has the risk of losing.

Peter Engberg Jensen

“So we would very much like to use the argument that if you actually refinance on a daily basis it would be as safe as if you have retail deposits. We are going to use that argument in the NFSR debate.”

Arnth Jensen said that a European Commission proposal for CRD IV is expected just before or after the summer holidays, with discussions in the European Parliament to follow.

“If we can prove that they are liquid then we think that will help us argue our case,” she said. “It’s a long way before we actually know what’s happening but it’s very important that we are fighting.”

A move to daily auctions could, however, carry disadvantages for the Danish.

“There is an advantage in trying to get investors’ interest at certain times of year by having big liquid auctions, and having big liquid bonds is actually advantageous for investors,” said Hjortshøj-Nielsen. “So you could argue that on average we would have higher funding costs by spreading it out. That is the risk.”

And one market participant said that he does not expect the spreading out of auctions to be as extreme as moving to every day.

“It’s not going to be a change that happens from one day to the next,” he said. “I don’t think the auctions will be daily. The mortgage banks just want to spread out the auctions more.”