June 12 (Bloomberg) -- Lars Rohde, the governor of Denmark’s central bank, lashed out at the nation’s banks for resisting efforts to tighten capital requirements.
“It’s an obvious misunderstanding that rising funding costs are an argument against banks holding more capital,” Rohde said in a statement on the bank’s website today. “The better capitalized a bank is, the less markets demand in returns, both on equity and debt. The societal costs of financial crises are considerable.”
The nation’s six biggest banks face as much as 5 percentage points in additional capital requirements if lawmakers decide to follow recommendations in a March proposal by a government committee. The industry has lobbied against the planned tightening of standards, arguing the measures will push up funding costs and make it harder to lend to businesses as the Danish economy struggles to grow.
“It’s not a law of nature that banks should have a return on equity of 15 percent or 20 percent, as many banks had before the crisis,” Rohde said at a press conference. “If banks feel funding costs are rising as they increase equity, that must be attributed to market flaws, which are mainly caused by investors expecting to be bailed out by the government.”
Denmark’s systemically important financial institutions “don’t have problems meeting capital requirements” in the central bank’s stress tests, Rohde said. “That reflects that the institutes since 2008 have focused on building their capital foundations.”
Still, several banks that aren’t systemically important to the economy need to build capital, the central bank said, citing the results of its stress test.
“Equity is low for most financial institutions and writedowns are high,” the bank said.
Denmark’s central bank reduced its growth forecast for this year and predicts the economy of Scandinavia’s weakest nation will grow 0.5 percent in 2013. In March, the bank had foreseen 0.8 percent expansion. The economy will expand 1.7 percent in 2014 and 2015, matching prior estimates, the bank said.
The $300 billion economy is struggling to emerge from a burst property bubble, which triggered a banking crisis and wiped out more than a dozen lenders since 2008. The government-backed Economic Council has urged the government to add stimulus to help spur demand. Rohde warned against such policy steps today.
“The economic situation doesn’t warrant easing of fiscal policy, even though the normalization of private-sector demand has been protracted,” Rohde said. “Instead, focus should be on increasing private and public sector productivity.”
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