“We support another investigation into whether there’s a need to strengthen rules further,” central bank GovernorLars Rohde said yesterday in an interview in Copenhagen. “The first priority is to implement what’s been recommended.” As central bank governor, Rohde is also the head of Denmark’s Systemic Risk Council, which monitors the banking system with a view to identifying potential threats to the greater economy.
Denmark’s systemically important financial institutions should hold as much as 5 percentage points in additional capital to protect the $340 billion economy from bank system shocks, a government-backed panel said in March. A separate committee appointed to investigate the causes of Denmark’s housing and banking crises said yesterday the latest recommendations may still be too low to protect taxpayers.
“The financial crisis demonstrates the magnitude of costs associated with financial breakdowns,” said Rohde, who became central bank governor in February after Nils Bernsteinretired. “Denmark suffered a substantial setback to the economy, even though it didn’t suffer any major casualties in the financial sector, and therefore we believe there’s plenty of reasons to strengthen the financial sector to a level that will make future crises less severe.”
Lax oversight by the country’s Financial Supervisory Authority and the central bank exacerbated the losses inflicted on Denmark’s housing and banking markets following the 2008 failure of Lehman Brothers Holding Inc., according to yesterday’s report.
“One of the lessons of the crisis is that tighter regulation and oversight is essential,” the report said. “It is one of the committee’s concerns that pressure will build to ease the tightening that is underway to secure robust financial institutions, including capital and liquidity requirements.”
Jesper Rangvid, professor of finance at Copenhagen Business School and the main author of yesterday’s report, said March recommendations on capital levels for systemically important banks still leave room for lenders to under-estimate balance sheet risks.
“We think the general Sifi recommendations are very good and we support them strongly,” Rangvid said yesterday in an interview. “What we are concerned about is the risk weights -- whether they can be estimated too low.”
Denmark needs an expert group to determine whether there’s a need for a higher leverage ratio -- which shows capital relative to total assets -- than the 3 percent contained within Basel III rules, the report also said. That could result in higher capital requirements for banks than those recommended in March for the country’s too-big-to-fail lenders and would also exceed minimum requirements under European capital rules.
“We don’t think there are any costs associated” with raising capital buffers, Rohde said. “We said in our financial stability report earlier this year that recent evidence suggests that the more capital a lender holds, the lower capital costs run, and that remains our position.”
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