Denmark’s bank watchdog aims to complete its inspections of lenders at risk of insolvency by January, and expects most will fail its audit.
The Financial Supervisory Authority’s review covers lenders identified by the regulator as “risky” and “in seven out of 10 inspections, we insist on either higher writedowns or higher solvency requirements,” Ulrik Noedgaard, director general at the FSA, said in an interview.
The regulator has warned Denmark’s banks it is stepping up risk management demands and will no longer tolerate what Noedgaard has characterized as “optimistic” reported writedowns. As many as 15 Danish banks may fail before the country’s crisis is over, Standard & Poor’s warned in July. The chairman of the state-backed bank resolution unit, Henning Kruse Petersen, has said there are about 75 too many regional banks in Denmark.
The three Danish banks that failed since February all lost money on property loans, while one also buckled under bad loans to farming. Two of the insolvencies triggered senior creditor losses under Denmark’s bail-in laws, the toughest in the European Union. Though the government passed a consolidation bill in September to avoid more bail-ins, there’s no guarantee senior creditors won’t suffer further losses, said Henrik Bjerre-Nielsen, chief executive officer at the winding-up unit known as the Financial Stability Co.
“Looking at the macroeconomic developments and the state of the commercial real estate market, things don’t look rosy right now,” Noedgaard said.
Danish banks are Scandinavia’s worst performing as the industry struggles to emerge from the fallout of a burst housing bubble and a frozen funding market. A deepening debt crisis and looming credit crunch in Europe threaten to exacerbate financial stresses in Denmark.
Danske Bank A/S had its credit grades put on rating watch negative by Fitch Ratings amid concern that Denmark’s biggest lender will suffer more losses from “continued asset quality erosion” in Denmark and Ireland, where Danske owns National Irish Bank.
Adding to pressure on Danish banks is the expiry of a state-backed guarantee on their debt. Lenders need to refinance about 158 billion kroner ($29 billion) by 2013 and will rely on a 400 billion-krone central bank liquidity lifeline to stay afloat. The government has said it will only extend individual guarantees in the event of mergers under its consolidation bill.
The Financial Stability Co. said this week it is advising banks at risk of insolvency to prepare plans for auctioning off their healthy parts after finding a last-minute buyer for Max Bank (MAX) A/S, a Naestved, Denmark-based lender that collapsed under the weight of bad real estate loans over the weekend.
“You’ll probably see more defaults. How many I don’t want to guess, maybe below 10,” Simon Christensen, a Copenhagen- based senior financial analyst at Nordea Markets, a unit of Nordea Bank AB, said yesterday. “But the sector will do a lot to make sure senior creditors aren’t hit by further haircuts.”
Senior bondholders took losses when Amagerbanken A/S failed in February and again when Fjordbank Mors collapsed in June. Central bank Governor Nils Bernstein has urged banks to reduce lending or look for buyers. Max Bank was able to sidestep the bail-in laws when it became Denmark’s first lender to test the consolidation bill.
Privately held Sparekassen Sjaelland A/S agreed to pay an undisclosed sum to take over all private and corporate clients at Max Bank with engagements of less than 5 million kroner a piece. The remaining commitments will be transferred to the Financial Stability Co.
“Nobody wanted to take over these large commercial portfolios and spend the next three, four years of their lives trying to sort them out,” Noedgaard said. “Being able to put them aside is a strong element of why we succeeded this time.”
Small banks are also under pressure to cope with tougher regulatory and reporting standards, adding to incentives to seek takeovers.
“All the new requirements, for example, more complex reporting, more legal skills, et cetera, can result in smaller banks looking for equally healthy partners,” Niels Storm Stenbaek, chief economist at the Danish Bankers Association, said yesterday in an e-mail.
Denmark’s banking crisis is taking its toll on recovery prospects as lenders cut of loans to businesses. A survey by the Confederation of Danish Industry shows lending tightened in the third quarter from the previous three months as banks deleverage, Klaus Rasmussen, the group’s chief economist, said earlier this month. A quarter of firms surveyed by the confederation said they had limited, or no, financing options in the second quarter.
“A lot of these banks have already taken significant writedowns on their loan portfolios,” Noedgaard said. “But what we see in Max Bank and Fjordbank is that, in the current economic climate, the loan portfolio gets weakened quarter by quarter, and that will imply more writedowns, more solvency requirements.”
To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at firstname.lastname@example.org