Danish Banks’ LTRO Borrowing Seen Limited by Collateral Quality

Danish banks probably don’t have enough eligible collateral to borrow the $17 billion needed to repay state-backed debt at the central bank’s offering of three- year loans, Danske Bank A/S (DANSKE) said.

“The collateral is fairly restrictive to get to the high numbers,” Steen Blaafalk, head of group treasury at Copenhagen- based Danske, said yesterday in an interview. “I don’t think we’ll come up to that level.” Denmark’s biggest lender said yesterday it will draw 20 billion kroner from the facility.

The central bank opened the longer-term refinancing operations this year to help banks facing a 2013 deadline repay state-backed debt and bridge a funding gap. Two bail-ins last year locked most of Denmark’s banks out of funding markets, spurring a credit squeeze that plunged the nation into a recession. The central bank will accept the safest bank loans as collateral for the facility, which carries Denmark’s benchmark lending rate, at a record-low 0.2 percent since July.

Danske Bank said it will tap the loans to generate extra liquidity, after borrowing 15 billion kroner when the central bank first offered the facility in March. Danske analysts had estimated the industry may borrow as much as 100 billion kroner, matching the amount outstanding in state-guaranteed debt.

“The collateral background the central bank has done actually restricts the number that comes out,” Blaafalk said.

The central bank will announce the results of the longer- term refinancing operation at 4 p.m. local time today. The offering of three-year loans is the last planned by the central bank.

Burst Bubble

Denmark has yet to recover from a burst real estate bubble that has led to a dozen bank failures since 2008 and threatens to tip the economy into its second recession in less than a year. The risk remains that more banks could “run into troubles eventually,” Kristian Vie Madsen, deputy director at the Financial Supervisory Authority, said in an interview.

This week Vestjysk Bank A/S (VJBA), the country’s six-largest listed lender, fired its chief executive officer after more than doubling its writedowns. The industry’s continued troubles show banks need the extra liquidity the central bank is offering.

Yet decisions by Jyske Bank A/S (JYSK) and Sydbank A/S, Denmark’s second and third largest banks, not to use the facility will limit the total amount lenders will seek, Blaafalk said. His bank is using the cheap cash as a basis for investment.

‘Tool Kit’

“We want to have this in our tool kit,” Blaafalk said. “The arrangement from the central bank is just as good as it was in March, and it makes economic sense. It’s actually at a lower rate today,” he said. “This one gives me an extra option when it comes to liquidity management.”

The central bank cut its benchmark lending rate to 0.2 percent in July, compared with 0.7 percent in March, as the bank fought to defend the krone’s peg to the euro from a capital influx.

Danske Bank has begun funding itself for next year. The lender needed 50 billion kroner to 60 billion kroner for 2012 and has so far raised 72 billion kroner, Blaafalk said in a Sept. 11 interview.

Nordea Bank AB analysts had estimated banks will draw about 30 billion kroner to 50 billion kroner from the central bank, while Sydbank predicts between 30 billion kroner and 60 billion kroner will be tapped.

The FSA has urged the banks to use the facility to build up liquidity buffers and ignore concerns that investors might perceive its use as a sign of weakness. Jyske Bank has said it’s shunning the loans because it doesn’t want to subordinate senior creditors.

No ‘Stigma’

“I don’t think there will be a stigma attached,” Blaafalk said. “Obviously, we have considered that as well to be a possible issue, but we don’t think it will be an issue.”

The 75 members of Denmark’s Association of Local Banks will probably draw about 10 billion kroner as a buffer against “uncertainties,” Jan Kondrup, the association’s director, said this month. That’s more than double the amount they borrowed in March, when banks drew a total of 19 billion kroner.

The facility gives “more flexibility” to banks, the majority of which are “in a good position,” Blaafalk said. “There might be some banks, if not all, that probably will want to say what they’ve done, so let’s see what the number is. Hopefully, there are more.”

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editors responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net; Christian Wienberg at cwienberg@bloomberg.net

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