Danish banks may get better access to funding as the country’s bail-in laws look set to spread, ending Denmark’s isolation, as global regulators call for stricter resolution laws for the biggest lenders.
“The Danish bail-in laws have made life difficult for the country’s lenders,” said Henrik Arnt, a Copenhagen-based analyst with Danske Markets. “With the globally systemic banks being subject to their own resolution schemes by next year, which also includes potential bail-ins by senior unsecured investors, Denmark will no longer stand out negatively and, in relative terms, Danish bank borrowing costs should come down.”
Global regulators want the world’s biggest banks to boost capital levels, and are urging national legislators to ensure an orderly resolution of failed banks and shield taxpayers in the process. The measures will include granting regulators bail-in powers to force losses on unsecured creditors in bank failures, imitating a bill introduced in Denmark in October last year.
Most of Denmark’s roughly 120 banks have been shut out of funding markets since the February collapse of Amagerbanken A/S triggered the European Union’s first senior creditor losses within a resolution framework.
“Since they were the first ones to implement a bail-in regime it had a disproportionate effect on Danish banks,” Jens Hallen, a London-based analyst at Fitch Ratings, said in an interview. “With other bail-in regimes the focus should be less on Danish banks.” Still, this won’t be enough to have a “material impact” because Danish lenders continue to face deteriorating asset quality amid a stalling economy, he said.
Arnt at Danske Markets said countries required to abide by the Basel-based Financial Stability Board’s decision on bank resolutions for systemically important lenders will probably apply similar rules to smaller banks too.
“The funding market in Europe is still very difficult for most lenders right now, especially with investors watching Italy,” Arnt said. “Right now economics are off the table and it is all about politics. It’s just a waiting game.”
Denmark is Scandinavia’s worst-performing economy. The nation risks slipping into a recession as house prices fall another 10 percent until 2013, the government-backed Economic Council said Nov. 3. Danske Bank A/S, Denmark’s biggest lender, on Nov. 1 reported its first net loss since the height of the financial crisis in 2009 and said it will cut 2,000 jobs in an effort to adapt to a tougher business climate.
Standard & Poor’s lowered Denmark’s Banking Industry Country Risk Assessments level to group 3 from group 2, reflecting a very low risk assessment of economic resilience and an intermediate risk assessment of economic imbalances and credit risk in the economy, according to a statement today. The scale runs from 1 to 10.
“The weak operating environment is exacerbated by the fact that Danish financial institutions are subject to funding pressures, principally because the banks will need to refinance their government-guaranteed debt,” Moody’s Investors Service said on Nov. 2. The refinancing need “may lead to overcrowding in the funding market,” the rating company said. “As a result, unsecured funding may, even for healthy institutions, only be available at increased rates.”
To ease the funding crisis, the central bank last month opened a 400 billion-krone ($74 billion) liquidity lifeline, the biggest in Denmark’s history. Still, banks may shun the support to avoid the stigma associated with needing aid, lenders including Sydbank A/S and Spar Nord Bank A/S said.
The global measures “are aimed at reducing moral hazard so we can deal with failures of large institutions without hopefully having market disruption and without having to use public money,” European Central Bank President Mario Draghi said last week.