Aug. 25 (Bloomberg) -- The Danish Central Bank will take control of Roskilde Bank A/S to avert a financial ``contagion'' after mounting loan losses drove the lender into insolvency and a private purchaser couldn't be found.

The central bank and a group of Danish financial companies will provide Roskilde 4.5 billion kroner ($890 million) in cash and assume 37.3 billion kroner of debt, Roskilde said in a statement yesterday. The bank was suspended in Copenhagen trading today, after falling 88 percent from a peak in April 2007.

``We wanted to secure financial stability in Denmark,'' central bank Governor Nils Bernstein said at a press conference in Copenhagen today. ``The alternative would have been that Roskilde went bankrupt and that would have resulted in a considerable contagion throughout the financial sector.''

Writedowns on real estate loans led to a pretax loss of at least 1 billion kroner in the first half, double an estimate the bank published on July 14, Roskilde said yesterday. Denmark entered a recession in the first quarter, the first European economy to do so since the global credit crisis began last year. The bailout is the first by the Danish central bank in 15 years.

Shareholders in Roskilde have lost about 1 billion kroner, while holders of hybrid capital, which ranks between debt and equity for repayment in the event of bankruptcy, have lost about 2.5 billion kroner, Bernstein said.

`Poorly' Run

``This bank has been run incredibly poorly, there's been no control on the credit risks,'' Per H. Hansen, a professor at Copenhagen Business School, told TV2 News.

Danish financial companies fell in Copenhagen trading, led by Amagerbanken A/S, which dropped 4.1 percent. Forstaedernes Bank A/S, which cut its profit outlook the day after Roskilde first announced it was being bailed out by the central bank, shed 3.2 percent. Roskilde's market value has fallen to 1.02 billion kroner from 7.6 billion kroner at the end June 2007.

Roskilde's failure was ``unique'' and linked to a ``very large exposure to the real-estate market,'' Bernstein said. ``In general, Danish banks are well prepared'' to cope with declines in the property market and a contracting economy, he said.

Michael Dithmer, an economy ministry spokesman, said the government is prepared for an additional 3.5 billion kroner in writedowns at Roskilde. The government ``does expect that further losses will be revealed,'' he said at the press conference.

Severe Uncertainty

Roskilde, based in the Danish city of the same name, received ``unlimited liquidity'' from the central bank on July 10 and the Danish Bankers Association agreed to cover as much as 750 million kroner of losses. The central bank said then the backing was conditional on Roskilde finding a buyer within six months.

``Potential buyers have expressed severe uncertainty as to the general credit culture of the bank,'' and therefore didn't submit bids for the bank in whole or in part, Roskilde said in the statement.

The central bank is acting with more than 100 of the country's private lenders, which last year pledged to cooperate in case of a bank failure. The central bank will put up 3.75 billion kroner, and the private financial institutions 750 million kroner.

Roskilde Chief Executive Officer Soeren Kaare-Andersen said last month the bank hadn't been able to reduce the size of its real-estate loan portfolio fast enough. Kaare-Andersen, who took over in January 2007, will remain as CEO, the company said.

Failure `Disheartening'

Roskilde's failure is ``absolutely, deeply disheartening,'' he said at a press conference today. The bank will remain in operation until it's been sold on by the central bank.

``The government backs the solution found for Roskilde Bank,'' Economy Minister Bendt Bendtsen said in a statement on the ministry's Web site. ``We had preferred that a private buyer had been found, but in the current serious situation, this solution is necessary.''

Roskilde said on July 14 it would write down as much as 900 million kroner for the first six months of the year. Since the July announcement, ``a large number of clients'' have pulled their assets out of the bank, it said yesterday.

Danish housing prices will drop as much as 10 percent this year and next year following a boom and rising interest rates, Svenska Handelsbanken estimates. Homeowner foreclosures rose in July to the highest since 2003, Statistics Denmark said.

Roskilde asked the Copenhagen OMX Stock Exchange to suspend the trading of its shares and the Oslo ABM and Irish Stock Exchange to suspend the trading of its issued bonds.

The central bank last bailed out a commercial lender in 1993, when, together with Sydbank A/S, it was forced to dismantle the assets of Varde Bank.

Scandinavia's last financial crisis occurred in the early 1990s following the real-estate boom of the 1980s. Nordbanken and Gota Bank went bankrupt and were merged in 1993 in a state- engineered restructuring. Nordbanken, Finland's Merita Bank, Denmark's Unidanmark and Norway's K-Bank were then merged from 1998 to 2000 to create Nordea Bank.

To contact the reporter on this story: Christian Wienberg in Copenhagen at cwienberg@bloomberg.net

Last Updated: August 25, 2008 12:20 EDT