risk of technical insolvency and lack of mobility. * * * since it became possible to issue covered bonds – in denmark known as sdos – instead of traditional mortgage bonds in 2007, these bonds have accounted for an increasing share of the outstanding volume of mortgage bonds – currently 60 per cent. as you know, sdos are subject to the condition that the value of the individual loan must never exceed 80 per cent of the underlying collateral. if house prices go down, the mortgage banks must pledge top - up collateral. one way of financing this is by issuing less collateralised junior covered bonds. the proceeds are used to buy e. g. government securities that are pledged as top - up collateral. in our estimate, a 10 - per - cent fall in house prices entailed a need for top - up collateral amounting to around kr. 25 billion in 2008. by 2010, this figure had risen to an estimated kr. 100 billion plus, mainly due to the more widespread use of sdos. consequently, danmarks nationalbank is pleased to note that the minister for economic and business affairs has met the wish to look into this issue. the risk is increasing and should be addressed in time. danmarks nationalbank has on previous occasions pointed to the option of reducing the borrowing limit in connection with mortgage credit. bis central bankers ’ speeches another familiar issue is refinancing risk in connection with adjustable - rate loans – in both kroner and euro. spreading the refinancing auctions over the year reduces the volume of adjustable - rate loans affected if an auction date coincides with a complete or partial market crash. danmarks nationalbank welcomes the invitation from the association of danish mortgage banks and the danish mortgage banks ’ federation to work with them to identify the possibilities of reducing the refinancing risk on adjustable - rate loans. with these words i would like to thank the association of danish mortgage banks and its members for our successful cooperation during the past year. thank you for your attention. bis central bankers ’ speeches

lose his house, as was the case with us subprime borrowers, the incentives are quite flawed, indeed. if a bank monitors the status of investment projects, diversification and economies of scale can be achieved. by financing multiple projects simultaneously and monitoring them over a relatively long period of time, banks can reduce their monitoring costs. by contrast, monitoring individual projects is inefficient. this explains the existence of banks – and of intermediaries. and it is probably also for this reason – at least as seen from the assets side – that commercial banking is a wholesale bank ’ s “ natural ” business model. bis central bankers ’ speeches through credit substitution business, many banks have departed from this model ; have surrendered much of the inherent, comparative ( says diamond ) advantages of their intermediary function ; have left credit assessments to rating agencies ; and have, in some cases, delegated monitoring. at the same time, when packaging loans and in lending contracts, they looked not at appropriate incentive structures but, above all, at tradability. if it can be traded, the risk can then be fobbed off on a third party – or, at least, that is how the thinking goes. in effect, securitisation techniques dissolved the link between oversight and the ultimate bearer of risk. the advantages of intermediation were forsaken without creating sustainable contractual solutions at the same time. even in theory, there was no way that could work. as warren buffett famously put it, “ it ’ s only when the tide goes out that you learn who ’ s been swimming naked. ” from that angle, the oft - cited deficiencies in some banks ’ risk management practices are not an accident, but instead, seen in that light, the logical outcome of the departure from the traditional business model. in this middle world between intermediation and the market, in which neither worked, there were simply not enough incentives to mitigate risk. please do not misunderstand me : i firmly believe that those innovations which have created real economic value added will survive in the long term. but that will probably be on a reduced scale, in less complex and more transparent structures, and embedded in supervisory practice. if used prudently and monitored carefully, they can enhance the performance of the financial system without jeopardising financial stability. another thing should not be overlooked : not every transaction that generates commission income is a complex securitisation. a savings bank