New international rules under way: Basel III and CRD IV

After the financial crisis, demands have been made for a reorganisation and tighter regulation of the international financial sector. Confidence needs to be restored, the risk of new financial crises must be reduced, and economic growth must be re-established.

At the 2009 summits, the G20 heads of government decided to ask the Basel Committee to prepare a proposal for a reform package (Basel III). The Basel Committee consists of the central bank governors from the major Western countries. Denmark is not represented.

The Basel Committee presented its recommendations in December 2009. It proposed a completely new international liquidity and capital adequacy framework for commercial and mortgage banks in Europe, the US and Asia.

This was followed by the European Commission's proposal to implement the recommendations in EU legislation through a revision of the Capital Requirements Directive (CRD IV). The proposal was published for consultation in February 2010.

Governments, central banks, authorities as well as trade and consumer organisations submitted responses to the Basel Committee's and the European Commission's proposals.
 
Based on the consultation responses, the Basel Committee presented a number of revisions to its original proposal at the end of July 2010. Its final proposal for a new capital adequacy and liquidity framework is expected to be presented at the end of 2010, after the G20 summit in November.

The European Commission is expected to present its draft proposal for a new Directive (CRD IV) after the Basel Committee's final proposal. After that, the draft Directive will be considered by the European Parliament and the Council of Ministers. Quite unusually, a majority of MEPs have expressed their opinions prior to the Commission's submission of a final proposal for a Directive. The European Parliament has a right of veto.

The proposals will, in their current forms, weaken the Danish mortgage system significantly in several respects. The most problematic areas are:
 

• Classification of covered bonds:
  Under the new liquidity rules, covered bonds – including Danish covered bonds – will be treated as "illiquid and risky" assets. Only sovereign debt will be regarded as liquid and secure.
   
• Use of self-issued bonds:
  Mortgage banks may not include self-issued covered bonds in their stocks of liquid assets.
   
• Short-term covered bonds:
  Under the new liquidity rules, covered bonds with times-to-maturity of up to one year are not eligible as "stable funding".
   
• Single Rule Book:
  A single rule book will introduce common cross-border standards.
   

Read more under Our opinion for a detailed description of the problems, our arguments and the likely consequences of the proposals if adopted in their current forms.