Denmark’s regional banking crisis claimed two lenders over the weekend, adding to three failures last year, as local banks stepped in to buy up their insolvent peers.
Den Jyske Sparekasse will take over all of Spar Salling Sparekasse, the Business and Growth Ministry said late yesterday. While depositors are protected, subordinated guarantee creditors and the state’s hybrid holdings will suffer losses, it said. Separately, Sparekassen Kronjylland A/S will take over the healthy parts of Sparekassen Oestjylland A/S, the government said. The merger will come under Denmark’s consolidation package, protecting senior creditors.
“The fact that two banks have collapsed doesn’t mean that there in general are problems with Denmark’s regional banks,” Business and Growth Minister Ole Sohn said in the statement. “It continues to be my view that Denmark’s financial institutions are in general sound.”
Denmark’s bank industry is still struggling to emerge from the fallout of its 2010 bail-in package, Europe’s only resolution framework that requires senior creditors to share losses. Moody’s Investors Service in February 2011 cut the senior credit ratings of five Danish banks following the failure of Amagerbanken A/S the same month. Denmark passed a merger bill last year in an effort to avoid more senior creditor losses and encourage lenders to channel credit into the economy.
The difference between the Copenhagen interbank offered rate and the equivalent euro-area rate grew to 23.15 basis points today, its widest since Sept. 30, 2010. Shares of other troubled Danish lenders slumped. Totalbanken A/S, a regional lender whose auditors said in March it may fail to stay afloat, fell the most in a month, plunging 13 percent to 22.60 kroner as of 12 noon in Copenhagen.
“Even though it’s always sad when a bank is in dire straits, it’s satisfying that it’s once again been demonstrated that it’s possible to find a sensible solution,” Joergen A. Horwitz, the director of the Bankers Association, said in an e-mailed statement late yesterday.
Moody’s said in February it may cut ratings for eight Danish financial institutions by as much as three levels, threatening to halt signs of thawing in wholesale funding markets. Moody’s, which is reviewing ratings of 114 lenders in 16 European countries, said in November the outlook for Denmark’s banking industry was negative, citing house price declines, a “sluggish” economy, and limited credit growth.
Still, Denmark’s ability to avoid senior creditor losses in the weekend’s insolvencies is “credit positive,” Moody’s spokeswoman Jessica Sibado said in an e-mailed reply to questions today. The ratings company maintains its view on the industry published in an October report, she said. Moody’s views Denmark’s consolidation package as good for the industry, while not being a “cure all,” she said.
“The system worked so senior unsecured bond holders were untouched by the transactions,” Thomas Hovard, head of credit research at Copenhagen-based Danske Bank A/S, said in an e-mailed response to questions.
Denmark’s banks have returned to funding markets this year as the government worked to reverse the fallout of the bail-in bill. Sydbank A/S, Denmark’s third-largest listed lender, in February sold its first senior bonds since 2010, paying 200 basis points more than the euro region’s interbank offered rate on 500 million euros ($658 million) of two-year notes. That followed a sale by Danske in the same week of 1 billion euros in five-year notes at 230 basis points more than the benchmark mid-swap rate.
The cost of insuring against a default by Danske Bank A/S, Denmark’s largest lender, versus Sweden’s Nordea Bank AB, has climbed almost 70 percent this year. Five-year default swaps on Danske’s senior debt hit a five-year high last week before easing to 338 on April 20, according to data provided by CMA.
Denmark’s state resolution agency, the Financial Stability Co., worked over the weekend to find alternatives to a bail-in after the country’s supervisory authority notified Spar Salling Sparekasse and Sparekassen Oestjylland they failed to meet solvency requirements.
A review of Lem, Denmark-based Spar Salling by the Financial Supervisory Authority showed “a portion of outstanding loans had weakened further since the last inspection in December 2010,” Ulrik Noedgaard, director general of the FSA, said yesterday in a statement. A review of Sparekassen Oestjylland found the bank failed to take enough write-downs on farm loans and didn’t set aside enough capital to meet solvency requirements, the FSA said.
Sparekassen Kronjylland, based in the Danish city of Randers, will take over deposits worth 3.9 billion kroner ($690 million) and loans worth 3.4 billion kroner, Financial Stability Co. said yesterday. The Financial Stability Co. will absorb the unhealthy remnants of Sparekassen Oestjylland’s business.
Hammel, Denmark-based Sparekassen Oestjylland had state-backed loans and guarantees of more than 1 billion kroner, according to Financial Stability Co.
Denmark is struggling to emerge from a burst real estate bubble that helped put the economy into a recession last year and sent loan losses surging among many of its regional lenders as agricultural loans soured. House prices will have slumped 25 percent by next year since the crisis started in 2007, the government-backed Economic Council estimated in November.