Stricter requirements for Danish mortgage credit institutions (MCIs) set out by the Danish FSA last Thursday are credit positive for MCIs, according to Moody’s, because they put funding and lending guidelines into a regulated framework and will help prevent future lending excesses.

The regulatory framework unveiled by the Danish FSA (Finanstilsynet) last Thursday, which is now open to public consultation, includes new supervisory guidelines that set limits for loan growth, interest-only loans, large exposures, short term lending, and variable rate mortgages, noted the rating agency. The regulator is also proposing a loan-to-value cap of 95% on residential loans and a requirement that the debt service for loans to commercial real estate be fully covered by a property’s rental income.

Moody’s said that the proposed guidelines are similar to ones already in effect, albeit with differences.

“The guidelines supplement existing solvency rules and address some of the risks that capital alone cannot mitigate,” it said. “Although there are no automatic penalties imposed on the MCIs that do not meet the limits, they will be required to report these data points as part of their annual and semi-annual financial reporting, and in their quarterly reporting to Finanstilsynet.

“Penalties against MCIs that exceed the limits will be at Finanstilsynet’s discretion.”

(See previous coverage for details on the five limits that make up the supervisory diamond.)

According to Moody’s, the proposals would help mitigate risks associated with variable rate lending and interest only lending, which it noted have been growing steadily over the past decade and where the regulator is focusing on those loans with LTVs of over 60% (in cases of residential property).

“Moreover, the proposals will allow banks to provide sufficient credit to consumers and limit exposure to rising interest rates for higher LTV loans that are insufficiently protected against house-price swings,” it added.

Finanstilsynet has proposed an LTV cap of 95%. Moody’s noted that MCI’s can already only finance a maximum of 80% LTV of a property, with bank loans able to finance any additional amount.

“The regulator noted that the 95% LTV cap on lending is already broadly in place, but by formally proposing the cap, it hopes to thwart any future easing of standards during credit booms,” said the rating agency.