Denmark will do what it can to protect banking assets needed to sustain the economy, the head of the nation’s central bank said.
“Concerning systemic institutions, one would do everything possible to protect the systemically important parts, which would include considerations to the well-being of the general public,” Governor Lars Rohde said in an interview in Copenhagen.
Denmark’s six biggest banks, identified by a government committee in March as systemically important to the $325 billion economy, are urging policy makers to back the designation with explicit assurances their creditors will never be bailed in. The government has argued against a blanket guarantee, while its advisory body, the Economic Council, says a broader bailout clause is needed.
Rohde is siding with the head of the committee on systemically important financial institutions, Michael Moeller, who has warned against giving blanket guarantees. The central bank is ready to use its tools to help Denmark’s biggest banks to the extent that doing so would aid the economy, Rohde said.
“Whether that means doing bail-ins or bail-outs will have to be a deliberate consideration,” he said.
Denmark’s systemically important banks, led by Danske Bank A/S and mortgage lender Nykredit Realkredit A/S, face as much as 5 percentage points in additional capital requirements if lawmakers back the March proposals. Danske Chief Financial Officer, Henrik Ramlau-Hansen, said last month Denmark should copy Sweden, where too-big-to-fail designation comes with an explicit promise from the government to bail the banks out.
The banks have argued the additional reserve requirements will hamper lending growth in the Scandinavian economy that’s suffered most since the 2008 failure of Lehman Brothers Holdings Inc. Most recently, the Financial Supervisory Authority yesterday ordered Danske to assign a higher probability of losses to its corporate loans, adding to the cost of lending.
The regulator is requiring that Danske add about 100 billion kroner to its risk-weighted assets. Danske has said it may appeal the decision, which will add 15 billion kroner to its equity requirement before 2022, Ramlau-Hansen said last night.
Danske shares slumped as much as 8 percent when the market opened in Copenhagen today, contributing to a drop as deep as 1.1 percent in the benchmark OMXC20 index of Denmark’s biggest stocks. The yield on Danske’s 3.875 percent note due February 2017 rose four basis points to 1.53 percent, according to data compiled by Bloomberg.
The central bank in Copenhagen said last week banks should expect lower funding costs from their Sifi designation. Rohde is also urging the industry to consider a model that bases bank contributions to Denmark’s deposit guarantee program on risk profiles.
Denmark became the first European Union nation to force losses on senior creditors in 2011, with the failure of Amagerbanken A/S in February of that year. The government has since repeatedly underlined its commitment to rules that protect taxpayers from financial industry losses.
Denmark’s bail-in legislation is shielding the economy from asset bubbles and protecting the government’s stable Aaa rating, Moody’s Investors Service said in a June 6 interview.
While the bail-in law has safeguarded Denmark’s sovereign rating, the financial industry has seen credit grades suffer. Moody’s said in April the wording of the Sifi committee’s proposals was too vague to trigger the ratings upgrades Danish lenders had anticipated.
Bondholders still deem Denmark’s banks a riskier investment than their Swedish peers. Five-year credit-default swaps on senior unsecured notes issued by Danske Bank trade about 53 basis points higher than similar contracts on debt sold by Nordea Bank AB of Sweden. Moody’s rates Danske Baa1, four steps below the Aa3 credit grade it gives Nordea.
European Union resolution laws will ultimately determine how much freedom national authorities have to bail out of bail in their lenders, Rohde said.
“The average rating must be the same, with or without state support for banks,” he said.
Peter Levring in Copenhagen at +45-33-457-122 or email@example.com