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Bail-Ins Key in Ending Vicious EU Bank Circle, Rohde Says

Europe needs to copy Denmark’s example in forcing bank bondholders to share losses if the region is to break the vicious circle connecting its banks and governments, Danish central bank Governor Lars Rohde said.

Denmark’s resolution framework has helped boost the AAA rated nation’s credibility, Rohde said in a speech delivered in Copenhagen today. The central bank supports a European bank union that works toward a common resolution framework, he said.

“The creation of a strong common deposit guarantee framework and not least a credible resolution regime with bail-ins for troubled banks is quite crucial if the EU is to succeed in limiting the negative contagion from banks to governments in a future bank union,” Rohde said.

Denmark’s bail-in legislation was first tested in February 2011, when regional lender Amagerbanken A/S collapsed. The credit event sent funding costs for Danish banks soaring and meant some of the country’s mid-sized lenders were unable to tap wholesale markets. Denmark’s example underlines the need to ensure such legislation is enforced across the whole region, Rohde said.

“It can’t be denied that Denmark’s decision to proceed with its resolution framework alone raised banks’ financing costs in the short term,” Rohde said. “That’s why it’s important that we have a common European framework for resolution.”

Nail It

European lawmakers and EU negotiators are due to meet tomorrow to resolve disagreement over banker bonuses, financial reporting and national regulatory power, which has stalled progress on new common banking rules.

“On the next step of the banking union, the issue of bank resolution, we want to nail the Danish bail-in model,” Economy Minister Margrethe Vestager said in an interview. “It is very important that shareholders will be the first in line to bear losses.”

Denmark has so far made a profit of 11.2 billion kroner ($2 billion) on its five bank rescue packages, including its 2010 bail-in legislation, the government said Jan. 25. The ultimate cost of the measures will depend on whether more banks with state-backed debt fail, the business ministry said in a report.

About 12 regional banks in Denmark have been taken over by the country’s resolution agency, Financial Stability. At least another dozen have been absorbed by stronger rivals. Denmark’s banking crisis, which followed a burst housing bubble in 2008, sent the nation into a recession, and the financial regulator warns more bank failures may follow.

Rohde, formerly the chief executive officer of Denmark’s biggest pension fund, ATP, took over as governor of the country’s central bank this month. He replaced Nils Bernstein, who retired after reaching 70.

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