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Denmark Takes Over Second Bank to Trigger Bail-In Rules

Fjordbank Mors A/S became the second regional Danish lender since Amagerbanken A/S’s collapse in February to resort to the state’s bank resolution package after it failed to meet solvency requirements.

The Danish state will step in after Fjordbank Mors on June 24 said it had no choice but to seek resolution after the Financial Supervisory Authority set a higher solvency requirement and asked it to write down more bad loans. The FSA’s request would have left the bank 700 million kroner ($133 million) short of capital, an amount it had no prospect of raising before a June 26 deadline, the Nykoebing Mors-based lender said.

The bank failure, forced by bad loans to the construction and farming sectors, is Denmark’s second to trigger a resolution package that allows for senior bondholder losses. Amagerbanken’s Feb. 6 collapse set a European Union precedent as unsecured senior creditors faced a 41 percent haircut on their holdings. Moody’s Investors Service has since downgraded a number of Danish lenders, including the country’s biggest, Danske Bank A/S, citing an absence of state support.

“It’s regrettable that the sector, after having looked more closely inside the bank’s books, nonetheless was unable to find a sector solution that would have covered the depositors and owners of senior debt that aren’t covered by the guarantee fund or by the individual state guarantees,” Economy Minister Brian Mikkelsen said in a statement late yesterday.

Guarantee to End

Guarantees on debt issued before the end of September last year will remain in place until 2013. Danish central bank Governor Nils Bernstein said in a June 20 interview lenders can’t expect state backing to continue after that, ignoring pleas from the Association of Local Banks. The government has also signaled it won’t extend the guarantee.

Holders of senior unsecured claims will take a loss of about 26 percent, Denmark’s state-appointed bank resolution unit Financial Stability said in a statement.

Fjordbank Mors had issued 398 million kroner in state-backed debt to bolster its hybrid core capital, according to its first-quarter report. It had also raised 26.7 million kroner in other hybrid core capital bonds.

The failure will cost the Danish Deposit Guarantee Fund 1.3 billion kroner and will trigger losses at Denmark’s three biggest banks -- Copenhagen-based Danske Bank A/S, Silkeborg-based Jyske Bank A/S and Aabenraa-based Sydbank A/S -- of about 5 percent of their 2011 net income via their contribution to the fund, Nordea Bank AB said today in a note.

Bank Shares Fall

Danske shares fell 2.75 kroner, or 2.9 percent, to 90.70 kroner at 11:15 a.m. in Copenhagen. Jyske declined 1.4 percent, while Sydbank dropped 2 percent.

Danish financial stocks were the only major industry group to decline in Copenhagen today of the country's 20 biggest publicly traded companies. Danish bank and insurance stocks lost 2 percent, compared with a 0.3 percent gain in the 49-member Bloomberg Index of European bank and financial stocks.

Denmark’s smallest regional banks were today’s biggest losers in the country’s all-share index, the KAX, as Aarhus Lokalbank A/S lost 23 percent and Max Bank A/S dropped 19 percent. Both lenders were unprofitable last year.

The FSA had requested that Fjordbank Mors write down loans of about 340 million kroner in the second quarter and it increased the solvency requirement to 16 percent from 9.7 percent, the bank said.

`Stricter Approach'

“The board doesn’t share the FSA’s assessment of these additional write-downs,” the bank said in a statement. “The board is of the opinion that the FSA’s view is a result of a stricter approach.”

Fjordbank Mors was formed November last year in a merger of Morsoe Sparekasse A/S and Morsoe Bank A/S. It sold new shares to raise about 110 million kroner in December after writing down bad loans of 243 million kroner last year.

The bank’s shares had lost 80 percent this year, giving the company a value of 92.4 million kroner. The stock dropped 4 kroner, or 24 percent, to 13 kroner on June 24 before the bank asked the exchange to suspend trading, citing “a rumor in the market” that it would fail.

Denmark’s banks may face “large” loan losses this year with the real-estate and agriculture industries being most at risk, the FSA said on May 5. The country’s banks wrote down 36 billion kroner of bad loans last year, compared with a record 58 billion kroner a year earlier, the regulator said.

Financial Stability said it will take over assets of 7.8 billion kroner and provide liquidity to a newly formed company that will serve Fjordbank Mors’ customers. All shareholder equity at the bank is likely to be lost, Financial Stability said.

“I have spoken with Financial Stability to ensure that there, as quickly as possible, be as large a part of Fjordbank Mors offered as possible -- and above all for all the private customers, so that they can, as quickly as possible, get a new, permanent bank connection,” Mikkelsen said.

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