Safeguarding investment in Danish mortgage bonds

This paper considers some safeguard measures protecting the investment in mortgage bonds against credit risk. 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 mortgage credit institutions and the minimisation of interest rate and credit risk borne by the institutions. 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.