effect, this is a further limitation of the range of business activities for MCIs, excluding them from granting top-up loans to the lender. Such top-up loans are, however, often offered by a commercial bank in the same financial group as the MCI.

Mortgages have a strong legal position via the Danish Land Registration and Cadastral System which is the central registration system for all land in Denmark. The legal position is ensured by a requirement of registration<sup>122</sup> of mortgages in this central registration system, the existence of a priority rank, and a fast and efficient foreclosure procedure.

The MCI operates as creditor towards the borrower. Thus, its assets are loans against mortgages and, corresponding to the own capital, investments in debt securities and other investment assets.<sup>123</sup> On the funding side, the MCI issues bonds and, as such, acts as debtor towards the investor (bondholder). As MCIs are credit institutions, they comply with the EC own funds Directive (see Chapter 3.2). Thus, the capital base of an MCI is safeguarded by the own capital of an MCI that must amount to at least eight percent of its risk-weighted assets.<sup>124</sup> Danish MCIs are by law prevented from undertaking any substantial currency, liquidity or interest rate risk, a consequence of the so-called “balance principle" in the Mortgage Credit Act.<sup>125</sup> It regulates the financial risk of the MCI resulting from differences in payments between loans and funding, fluctuations in interest and exchange rates and the use of financial instruments. In general, an MCI is exposed to interest rate risk, if its (interest rate sensible) assets have a different maturity than its (interest rate sensible) liabilities. Normally, a commercial bank that funds itself through (short-term) liabilities, e.g., deposit-taking and grants loans (via bond issuance) with a maturity up to 30 years at a fixed nominal interest, will be exposed to an extreme level of interest rate risk. The "balance principle" is a safeguard against industrial property, office and shop property, and vacation homes. This "haircut" of 20 – 40 percentage points of the value of the property at the time of the borrowing provides a safeguard against adverse price movements from the time of borrowing until the time of a forced sale of the property. It also lowers the probability of a borrower willingly defaulting (he has nothing to win, unless the value of the property falls below the value of the mortgage). Explicit rules for the prudent valuation of the property minimizes this risk. The primary valuation rule stipulates that valuation has to be made on a cash basis reflecting the market value of the property. However, the value can not exceed the price "a skilled purchaser with a knowledge of the local market and price conditions would pay for the property" - Mortgage Credit Act § 41(2).

122 If a property related to a default mortgage loan is sold by compulsory sale, the claims from lenders with a registered right are separated from the mass and are paid (if possible) in the order of priority, i.e., the first mortgage gets paid in full before any second mortgage. Mortgage loans are normally secured by a first mortgage. This priority rank is stipulated both in the provisions of the deed and are usually also respected in standard terms for other registered documents with rights on the property. As the registration is the constitutive act which completes the mortgage, it also protects the MCI (and its bondholders) against other claims on the property, e.g., as collateral for another loan to the borrower.

123 Contrary to a U.S. type system where assets are sold out of the issuer ́s balance sheet by a master trust, the loans remain on the issuer ́s balance sheet. This is the same principle as with German Pfandbriefe.

124 It is worth mentioning that further Danish initial (absolute) capital requirements requiring MCIs to have own funds of at least DKK150 million by far exceeds the minimum capital requirements set by the EC own funds directive. This requirement further strengthens the MCIs ability to meet its requirements.

125 Mortgage Credit Act §§ 48 - 49 and Executive Order No. 1417 of December 22, 2000 on balance of interest- and currency risk with mortgage bond issuance.

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