Denmark’s bank regulator reprimanded Danske Bank A/S for inadequate management of market risks two months after ordering Denmark’s biggest lender to add $18 billion in risk weighted assets.
The Financial Supervisory Authority said today the Copenhagen bank must ensure control of market risks across the company, weigh risks against returns, and safeguard against alterations to risk models driving changes in assessments. The agency also called for greater transparency in decision making.
“The bank has had in a few short years very large profits from activities with a market risk, also in comparison to peers,” the FSA said in a statement on its website. “The bank shall ensure that the validation of models of market risk are sufficiently independent of the models’ development.”
The Copenhagen-based agency ordered the improvements after reviewing a study on the bank’s risk management systems that Danske paid for and that was requested by Denmark’s 14-member Financial Council, which advises the FSA on key cases. The FSA said it received the analysis, conducted by the consulting firm Oliver Wyman, on June 18. The review was ordered to determine whether Danske had taken on more risk than it budgeted for and whether its assessments mirrored reality.
Danske agreed to increase capital allocated to meet its solvency requirements by 300 million kroner ($54 million) from the second quarter to 1.3 billion kroner, the FSA said.
Danske, identified by a government panel as one of Denmark’s too-big-to-fail banks earlier this year, reported a 46 percent jump in second-quarter net income earlier this month as impairments dropped by almost half. The bank said its solvency need was 11.3 percent, up from 11 percent three months earlier.
The Wyman report found Danske’s systems were generally adequate, with areas for improvement, the FSA said. The report found there had been “significant” considerations on handling risk occurring outside relevant committees, raising the likelihood of unclear decision making, the FSA said. The market risk division also was responsible both for designing models to determine market and counterparty risk, and for testing the models.
Danske has taken steps to improve risk management, the FSA said. The bank is hiring an external consultant to assess its models, and the market risk committee hired four people earlier this year, bringing total employees in the unit to about 46. Management has agreed to hire more people as needed, the FSA said.
Danske fell as much as 2.2 percent in Copenhagen trading, and had lost 1.8 percent, or 2.1 kroner, to 114 kroner at 2:51 p.m. local time. Trading volume was 53 percent of the three-month average.
To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at firstname.lastname@example.org