Denmark’s financial regulator is looking into extending a deadline for banks that fail solvency tests to give them more time to find fresh capital and escape bankruptcy.
Banks, which now have 48 hours to come up with new capital if they fail an inspection by the Financial Supervisory Authority, could be given a grace period of up to three months if they commit to selling assets, issuing capital, restructuring their business or changing management, according to Ulrik Noedgaard, the Copenhagen-based FSA’s general director.
“We’ll have a more patient approach,” Noedgaard said in an interview in Copenhagen. “If the board is ahead of the curve, we would clearly just stay away and, if nothing happens, then we would get closer to the process and potentially issue orders.”
The strategy constitutes an about-face for the agency, whose aggressive enforcement has led the industry to allege some banks were prematurely shut down. The FSA has declared more than a dozen banks insolvent since Denmark’s property bubble burst in 2008. The regulator argues banks failed to take big enough writedowns to reflect the slump in the real estate market. House prices have collapsed about 25 percent since their peak in 2007, government figures show.
A softer approach from Denmark’s financial watchdog reflects concern globally that banks may need more time to comply with tougher rules as much of Europe sinks into a recession. Denmark’s economy barely grew last quarter while a contraction in the three months through June was deeper than previously estimated, the statistics office said today. Gross domestic product expanded 0.1 percent on the quarter and shrank 0.7 percent in the previous period, it said.
In the U.S., regulators said earlier this month they won’t meet a Jan. 1 deadline for capital requirements, prompting the European Banking Federation to ask European Union Commissioner Michel Barnier for a delay.
The Danish FSA’s proposal to give banks more time to raise capital is under consideration in parliament, along with a more stringent method for calculating solvency requirements.
Shares in Danske Bank A/S, Denmark’s biggest lender, rose 1 percent to 97.90 kroner as of 11:01 a.m. in Copenhagen, their highest level since Oct. 30. That compares with little change in the 38-member Bloomberg index of European financial stocks. An index of Danish bank shares rose 0.6 percent, also the highest since the end of October.
Denmark last year became the first country in Europe to enforce bail-in legislation, leading to senior creditor losses after the FSA declared Amagerbanken A/S and Fjordbank Mors A/S insolvent. Nordea Bank AB (NDA) Chief Executive Officer Christian Clausen, who is also the president of the European Banking Federation, said last month that stricter writedown rules imposed by the FSA in April were “extreme” in a global context.
“Here in Denmark, our approach so far has been quite tough compared to what you see in other countries,” said Noedgaard, who became head of the FSA in 2009. The proposal now to take a “more patient approach,” will be “a really big change,” he said.
The shift “fits well with the timing,” Noedgaard said. “We are currently in a quite stressed situation for the banks.”
Continued failures have revived concerns among investors that Denmark’s banking crisis is far from over. Toender Bank A/S, a regional lender close to the German border, failed earlier this month after the FSA said bad loans were 10 times the size those reported by the bank. It was taken over by Sydbank A/S, Denmark’s third-biggest listed lender.
Danish banks pay more to fund themselves than their rivals in neighboring Sweden and Norway. Credit default swaps on Danske Bank A/S, Denmark’s biggest lender, traded at about 150 basis points this week, or about 60 basis points higher than contracts insuring against a default on senior notes issued by Sweden’s Nordea.
Danske is fighting for so-called Sifi designation, arguing that a systemically important financial institution would not be allowed to fail by the government. Making that point clear to investors would help reduce its funding costs, Chief Executive Officer Eivind Kolding said in an interview earlier this month.
Roughly a quarter of Danish banks don’t generate enough core earnings to cover average industry writedowns, the FSA estimates. About 3.2 percent of the country’s lenders are under “intensified supervision” because they risk failing to meet their solvency requirements, according to the agency.
Three regional banks (DANSKE) failed the central bank’s latest stress test, published Oct. 25. A fourth bank would be close to breaching capital rules, while the nation’s four biggest lenders, including Danske, all passed.
Including mergers, the number of Danish banks has dropped by 28 percent, to about 106, since the crisis started, according to FSA figures. The numbers don’t include mortgage banks, which operate under separate licenses in Denmark.
The FSA wants to preserve its right to intervene and even shut down a bank if it fails to show it’s making appropriate efforts to turn around its business, Noedgaard said.
“You have to come up with a plan,” Noedgaard said. If that doesn’t work, “we should have increased authority if the necessary actions aren’t taken, so that we would take the necessary actions,” he said.
To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at firstname.lastname@example.org