Danish FSA Tells Bank Boards to Wise Up as 50% Fall Short

Denmark’s financial regulator is telling supervisory boards overseeing the country’s biggest banks to improve their level of expertise to avoid falling foul of regulatory standards.

Half of Denmark’s 20 biggest banks don’t have a board member with bank industry management experience, Financial Supervisory Authority Director General Ulrik Noedgaard said. That means they’re not fulfilling basic regulatory requirements designed to ensure banks are properly run, he said.

“We’re raising the bar,” Noedgaard said in a telephone interview yesterday. “Roughly half of them are not compliant as we speak so they will need somehow to change their boards.”

About 12 Danish banks have failed since 2008 as lenders including Roskilde Bank A/S and Amagerbanken A/S were wiped out after the country’s housing bubble burst a year earlier. The turmoil has prompted the government to push through five bank rescue packages in the past four years as policy makers struggle to put an end to the crisis. As those measures falter, the FSA is clamping down on lenders with stricter impairment rules, stealth audits and tougher demands on governance.

“Our ambition is that we would see a lift in the overall competency or, alternatively, we create an incentive for the smaller banks to stay simple,” Noedgaard said. “If they do that, that’s fine by us.”

Too Much Leeway

Banks collapsed partly because boards gave managers too much leeway and failed to check their decisions, the FSA said yesterday. Boards let managers pursue businesses in which the banks had no experience and, in some cases, allowed management to skirt their oversight entirely, according to the regulator.

Noedgaard didn’t identify specific banks.

Demands on individual board members and on boards as a whole already exist in law. The FSA last year told boards to do annual evaluations to ensure they meet regulatory standards.

Now, the agency is making its demands more specific. It wants larger banks to have at least one board member with management experience from a financial company. The more complex a bank is, the “more demanding” the agency will be with regard to board members’ skills, Noedgaard said.

The FSA said yesterday boards must submit their evaluations for review by October. If banks are found to be in breach, the FSA can demand the resignation of board members. Smaller banks may abandon businesses in which they have no board expertise.

The tougher governance demands are part of an increased focus on oversight of Denmark’s banks and stretches to the insurance and pension industries. The financial sector faces a May 1 deadline to respond.

The industry is already fighting the regulator’s crackdown on how and when banks write off losses. Those rules will inflate losses and lead banks to retrench to protect capital buffers, Poul Kjaer, head of regulation at the Danish Bankers Association, said in an interview this month.

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