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Sweden Wants Bail-In Model to Target Senior Bank Creditors

A Pedestrian Walks Past A Branch Of Danske Bank A/S
The Feb. 6 failure of Denmark’s Amagerbanken A/S forced a 41 percent loss on unsecured senior bonds and prompted Moody’s Investors Service 10 days later to cut ratings on five Danish lenders, including Danske Bank A/S , as it factored out state protection. Photographer: Chris Ratcliffe/Bloomberg

Sweden’s financial regulator wants to copy a bail-in model first tested in neighboring Denmark to ensure that senior bondholders share losses in insolvencies.

The Stockholm-based Financial Supervisory Authority wants bank insolvency rules in Sweden and the rest of Europe to discourage risk-taking by driving home the message that creditors will no longer be bailed out by taxpayers, said Martin Andersson, the regulator’s director-general.

The Feb. 6 failure of Denmark’s Amagerbanken A/S forced a 41 percent loss on unsecured senior bonds and prompted Moody’s Investors Service 10 days later to cut ratings on five Danish lenders, including Danske Bank A/S, as it factored out state protection. The insolvency was the first to test rules Denmark put in place in October and set a European Union precedent for senior creditor losses amid a region-wide debate on burden sharing.

“The development in Denmark is a good one. It illustrates that you take risks when you put money into a bank and you can lose money,” Andersson said in an interview in Stockholm. “I think this is what we need in the future and what we will hopefully see on the EU side and what we will definitely argue for in Sweden. Owners should definitely be wiped out and creditors should bear losses” in bank insolvencies.

Andersson said banks aren’t likely to see their funding costs rise as a consequence of such measures as stricter winding down rules will encourage more responsible behavior. That will affect funding markets and keep wholesale borrowing costs down, he said.

Danske Bank

Denmark’s example may yet prove him right. Just under four months after Amagerbanken’s failure, Danske Bank, the country’s largest lender, says it isn’t paying too much to borrow. Spar Nord Bank A/S, which in February cancelled a bond auction on concern funding costs would be too high, was able to return to the market on May 12.

“Danske Bank can approach the markets for funding at relatively attractive prices,” Chief Executive Officer Peter Straarup said in a May 10 interview. Any increase in borrowing costs following Amagerbanken’s failure has been “marginal,” he said. The lender’s credit default swaps have widened because of concern about its Irish units, Straarup said.

“Our sense is that Danske Bank has been able to approach the markets even though our CDS spreads have been elevated. I don’t think our CDS spreads are so elevated because of Amagerbanken,” he said.

Beyond ‘Panic’

At Spar Nord, Denmark’s fourth-largest bank, the road back to wholesale funding has been a bit tougher, Ole Madsen, the lender’s spokesman, said by phone on May 13.

“We were planning a larger issue for the day after the Amagerbanken collapse. We had to postpone it then,” Madsen said. “We did the preparation. We did the pan-European road show. We had investors lined up and then all of a sudden it wasn’t feasible.”

Spar Nord has since focused on Scandinavian investors “who know the bank and were able to see past the panic that’s been directed at Danish mid-sized banks after what happened in Amagerbanken,” he said. “We’re hoping the Scandinavian issue will help pave the way to a broader European issue later this year.”

The bank paid 180 basis points over three-month Euribor to borrow 200 million euros ($282 million) this month, compared with about 150 basis points before Amagerbanken’s collapse, Madsen said.

Competitive Advantage

“To have strict regulation, a strong supervisory regime, is not a competitive disadvantage as some claim, I think it’s a competitive advantage in a global financial system,” the Swedish FSA’s Andersson said. “So far, we haven’t seen anything that says our view is the wrong one. Funding costs are not going up. That’s what we expected.”

Nordea’s shares dropped 0.9 percent as of 10:32 a.m. to 69.90 kronor. Danske stock lost 2.7 percent to 107.20 kroner.

Sweden’s commitment to pushing through some of the world’s toughest capital adequacy rules has yet to hurt lenders’ funding access, Nordea Bank AB’s Chief Executive Officer Christian Clausen said in a May 12 interview.

Though Clausen, who heads the Nordic region’s biggest bank, in February called Sweden’s goal of exceeding capital standards set by the Basel Committee on Banking Supervision “not realistic,” he in an interview this month said “we are in much better shape than the average in Europe” when it comes to funding access.

Not Helpful

Still, Danish lawmakers on May 13 started debating a proposal from Economy Minister Brian Mikkelsen that will make it easier to sidestep Europe’s toughest winding-down rules. The bill would promote consolidation by allowing healthy banks to tap cash in the country’s depositor guarantee fund to finance acquisitions of troubled lenders.

The move could help Denmark weather any funding disruptions that may yet hit the country while it waits for others in the region to copy its model. According to Jesper Berg, senior vice president at Nykredit A/S, as long as Denmark is an outlier with its bail-in precedent, its banks face a potentially inhospitable funding environment.

“The impact of Amagerbanken on the funding situation of Danish banks was not helpful,” Berg said in an interview. “Denmark is still ahead in Europe in its implementation of bank resolution schemes at a time when financial markets are very nervous about these. Other countries will follow, but until then, Danish banks will have a funding disadvantage.”

BankNordic P/F, based in Torshavn on the Faroe Islands, said today it submitted a binding bid for the healthy parts of Amagerbanken, without disclosing a price. Jyske Bank A/S, Denmark’s second-biggest lender, on May 2 said it was also considering making an offer.

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