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Denmark Reaches Bank Deal to Spur Consolidation, Avoid Bail-Ins

Danish lawmakers agreed on the country’s fourth bank bill since 2008 in an effort to spur takeovers and sidestep the European Union’s harshest resolution laws.

The package, which amends legislation that triggered senior creditor losses in bank insolvencies, will allow the state to assume troubled lenders’ bad loans in the event of takeovers, Economy Minister Brian Mikkelsen said today in Copenhagen. The cost of the plan, which also allows merging banks to tap the depositor guarantee fund, will be borne by the industry, he said.

Danish banks have faced an international funding wall this year after senior creditors took losses on the failures of regional lenders Fjordbank Mors A/S and Amagerbanken A/S. The country’s lenders rose in Copenhagen trading today as lawmakers representing a majority in parliament said they agreed on the proposal’s details. The legislature must still approve the bill,

“We’ve provided a framework for healthy banks to take over unhealthy ones,” Mikkelsen said. “The government will not lose money and the sector will pick up the bill.”

The government’s previous efforts to prevent failures by encouraging consolidation had failed as banks balked at the prospect of taking over bad commercial and agricultural loans.

Today’s plan will help provide funds in the event of takeovers by extending state-guarantees on bank bonds by as much as three years. The government will also set up a board that will identify the country’s too-big-to-fail banks.

‘Acute Situation’

Danske Bank A/S, the country’s biggest, rose as much as 5.4 percent and gained 3.60 kroner, or 5 percent, to 75.85 kroner at 11:41 a.m. local time. Jyske Bank A/S, the second-largest listed lender, climbed as much as 4.7 percent, while third-largest Sydbank A/S jumped as much as 6 percent.

Denmark’s finance industry union, which represents 55,300 employees, on Aug. 22 urged politicians to disregard election politics and change resolution laws as banks face an “acute situation.” Denmark will hold general elections by Nov. 12.

The government this week said the country’s budget deficit will widened amid measures to stimulate the economy. It also cut the economic growth forecast for this year to 1.3 percent from 1.9 percent forecast in May, after introducing a stimulus package that it said was fully funded to jumpstart a frozen housing market.

Lenders including Aalborg-based Spar Nord Bank A/S, Denmark’s fourth-biggest listed bank, are dumping assets to generate cash in the absence of market demand for their bonds. Skive, Denmark-based Sparbank A/S today said it will cut 35 jobs.

Guarantee Ends

The liquidity squeeze had threatened to worsen as many of Denmark’s 120 lenders are required to refinance $35 billion in state-backed debt by 2013 when the guarantee ends. Standard & Poor’s said July 28 a further 15 banks in the Nordic country “could default,” costing as much as $2.3 billion in the next three years.

A proposal by Nykredit A/S, the country’s biggest mortgage lender, to pool borrowing needs for small banks stalled amid concerns investors wouldn’t buy the new products. “I think the solution will be that people have to go to the market individually,” Nykredit Chief Executive Officer Peter Engberg Jensen said Aug. 23.

The central bank said last week it will accept bank loans as collateral. The measure, which becomes effective Oct. 1 and runs until further notice, will “ensure the banking industry has sufficient liquidity ahead of the 2013 expiration of state-guaranteed bonds,” Thomas Hovard, chief analyst in corporate bonds for Danske Markets, a unit of Danske Bank, said.

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