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Danish Bank Law Gets Backdoor Overhaul to Accelerate Mergers

Danish Bank Law Gets Backdoor Overhaul to Accelerate Mergers
A flag flies on top of Danske Bank A/S headquarters in Copenhagen. Photographer: Chris Ratcliffe/Bloomberg

Denmark’s latest state-subsidized bank merger was ushered through without parliament's approval as the government stretches an existing law to avoid failures that risk pushing more losses on to private creditors.

The Business Ministry last month let two troubled lenders tap state support reserved for healthy banks buying struggling peers, broadening legislation that had failed to spur consolidation. The ministry will seek parliament's backing for the amendment ``soon,'' said Henrik Bjerre-Nielsen, the head of the government’s bank resolution unit, the Financial Stability Co.

“We have no legal basis currently for granting it, but I understand that the government is seeking that,” Bjerre-Nielsen said in an interview. “It will come pretty soon.”

Denmark’s government is stepping up efforts to avoid more bank failures that would trigger the country’s bail-in laws. Two insolvencies last year pushed losses on to senior creditors, and left most of Denmark’s 120 banks shut out of funding markets as investors balked at the specter of burden sharing. The financial regulator has said more banks may fail this year.

Vestjysk Bank A/S and Aarhus Lokalbank A/S said Jan. 25 they will merge and announced the same day the deal would come under the government’s bank consolidation law, allowing them to extend state guarantees on their debt that had been due to run out by 2013.

“This is something we believe is fair to do,” Bjerre-Nielsen said. “It is the prudent thing to do.”

Double Writedowns

Vestjysk a month earlier had been told by the financial regulator to double its reported writedowns after the watchdog found the bank had understated its risky assets. Vestjysk shares plunged 73 percent last year, while Aarhus Lokalbank stock sank 86 percent after both banks failed to generate profits.

Allowing more troubled banks to use the government’s merger support could help spur the consolidation wave the industry needs, said Ulrik Noedgaard, director general of the Financial Supervisory Authority.

The change means that more banks may be able to extend next year’s deadline on about $30 billion in state-backed debt. Efforts to generate the extra capital needed to honor that target had forced many lenders to dump assets and call in loans.

The amended consolidation bill is also less likely to offend European regulators, who don’t want state subsidies to go to healthy banks.

Liquidity Lifeline

Moody’s Investors Service cited a lack of government support for Denmark’s financial industry when it cut five bank ratings a year ago. A three-year lending facility that the central bank in Copenhagen announced in December may be of limited use in ending Denmark’s banking crisis, Noedgaard said, putting more pressure on the government to come up with support measures.

“Clearly, our impression is that, with the challenges in terms of refinancing the state guarantee getting even closer, there is a lot of effort being put into coming up with solutions for this,” Noedgaard said.

Central Bank Governor Nils Bernstein has urged banks at risk of failure to reduce lending or look for buyers rather than risk a collapse that would worsen the funding crisis. At the same time, the FSA is imposing more rigorous capital standards and writedown rules, a development industry groups are warning will exacerbate a credit crunch.

Denmark is close to unveiling extra measures to accelerate bank mergers, Brian Mikkelsen, a member of the parliamentary committee that oversees banks, said Jan 25. Mikkelsen, as economy minister until last year, was an architect of the original consolidation legislation.

“We have to see whether more banks will actually use this scheme now that it has proven it can actually be used in practice,” Noedgaard said.

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