Danish central bank mirrors ECB - a positive move
Yesterday, the ECB introduced two unlimited LTRO (longer-term refinancing operations) liquidity programmes with 36-month tenors (with the option of early repayment after one year) to cope with increasing liquidity concerns for the European banking sector as alternative funding opportunities are drying out.
Shortly after the announcement from the ECB, the Danish central bank announced its own three-year liquidity programme for Danish banks. We see this news as significant and very positive as it should, to a large extent, help Danish banks address their funding needs in 2012 and 2013 (large bulk of government guaranteed issuance maturing) and also enable them to comply with regulatory liquidity requirements. However, for the banks that are challenged on their capital position, nothing has changed.
For the larger Danish banks, this facility might not be utilised but having the option is very constructive and an excellent backstop. Furthermore, we consider the pricing terms of the facility (normal central bank lending rate) to be attractive, which in turn reduces the risk of stigmatisation. In a wider context, the hope is that the improved funding situation will ease the credit situation in Denmark but it is still too early to draw any conclusions.
The conditions for the 36-month facility are the same as for the six-month facility
introduced in October. For example, funding can be backed by a collateral pool of bank lending (see text below concerning the specific terms of the new facility).
The Danish FSA has limited the success of the 6 months facility introduced in October by limiting the utilisation to only 33% of the minimum liquidity requirement. With the new duration of 36 months the facility fits well with the Basel III net stable funding ratio and the FSA’s own funding ratio (the supervisory diamond). Thus we expect fully inclusion of this new facility in regulatory liquidity requirements but nothing has officially been announced yet.
Details of the six-month facility from October
The two most important characteristics of the new facility from October were access to six months funding (now 36 months) and a significant broadening of the collateral base.
The parts of the loan book that can be used for collateral are those of good quality as measured by the FSA standards and all sectors except financial institutions are eligible. More specifically, loans classified in group 3 or 2a are eligible (the FSA has five rating classes), which must be confirmed by auditors.
One single loan may account for only 10% of the total collateral pool and a haircut of 25% + a 10% margin (to absorb value adjustments of the loan portfolio). The banks will have to pay for the costs relating to the facility themselves and this is expected to be a fee of 0.002% p.a.
The normal lending rate applies to the loans obtained, i.e. currently banks can get access to funding at a rate of 0.8%, which is below other funding options available for many banks.
Yesterday, the ECB introduced two unlimited LTRO (longer-term refinancing operations) liquidity programmes with 36-month tenors (with the option of early repayment after one year) to cope with increasing liquidity concerns for the European banking sector as alternative funding opportunities are drying out.
Shortly after the announcement from the ECB, the Danish central bank announced its own three-year liquidity programme for Danish banks. We see this news as significant and very positive as it should, to a large extent, help Danish banks address their funding needs in 2012 and 2013 (large bulk of government guaranteed issuance maturing) and also enable them to comply with regulatory liquidity requirements. However, for the banks that are challenged on their capital position, nothing has changed.
For the larger Danish banks, this facility might not be utilised but having the option is very constructive and an excellent backstop. Furthermore, we consider the pricing terms of the facility (normal central bank lending rate) to be attractive, which in turn reduces the risk of stigmatisation. In a wider context, the hope is that the improved funding situation will ease the credit situation in Denmark but it is still too early to draw any conclusions.
The conditions for the 36-month facility are the same as for the six-month facility
introduced in October. For example, funding can be backed by a collateral pool of bank lending (see text below concerning the specific terms of the new facility).
The Danish FSA has limited the success of the 6 months facility introduced in October by limiting the utilisation to only 33% of the minimum liquidity requirement. With the new duration of 36 months the facility fits well with the Basel III net stable funding ratio and the FSA’s own funding ratio (the supervisory diamond). Thus we expect fully inclusion of this new facility in regulatory liquidity requirements but nothing has officially been announced yet.
Details of the six-month facility from October
The two most important characteristics of the new facility from October were access to six months funding (now 36 months) and a significant broadening of the collateral base.
The parts of the loan book that can be used for collateral are those of good quality as measured by the FSA standards and all sectors except financial institutions are eligible. More specifically, loans classified in group 3 or 2a are eligible (the FSA has five rating classes), which must be confirmed by auditors.
One single loan may account for only 10% of the total collateral pool and a haircut of 25% + a 10% margin (to absorb value adjustments of the loan portfolio). The banks will have to pay for the costs relating to the facility themselves and this is expected to be a fee of 0.002% p.a.
The normal lending rate applies to the loans obtained, i.e. currently banks can get access to funding at a rate of 0.8%, which is below other funding options available for many banks.