Nordic Bank Default Model Is Safest for Creditors, Moody’s Says

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There’s probably no better place to be than Scandinavia if the bank you own bonds in happens to default.

That’s the view at Moody’s Investment Services, which cites the high degree of coordination among the region’s regulators compared with the rest of Europe. The collaboration means cross-border bank resolutions are likely to be less messy than elsewhere, said Oscar Heemskerk, an associate managing director in Moody’s European financial group.

“If the Swedish regulator could only bail in Swedish liabilities, that may restrict the available loss-cushion for senior creditors,” Heemskerk said.

Creditors are being forced to take a closer look at how their investments would be handled in defaults after governments from Copenhagen to Washington made clear that taxpayers won’t ever again bear the risk for bank failures.

Banks must draw up so-called living wills detailing how they might be broken up, including ensuring they have enough loss-absorbing capital. The document should also designate either a single regulator to unwind the bank or officials from the various countries in which the lender does business.

Regulators in Europe have the last word, according to legislation adopted last year by the European Parliament. Nordic watchdogs are likely to continue their history of collaboration and work across borders, Heemskerk said.

Nordea, Danske?

“We believe that Nordic authorities would resolve -- if that were ever the case -- a bank like Nordea or Danske through a single point of entry,” he said. That means “equal treatment of creditors for the parent banks and those of their Nordic subsidiaries.”

In contrast, when looking at European banking groups, Heemskerk said, “in most cases we would look at liabilities that are issued in the specific jurisdiction of the resolution authority.”

Moody’s on June 17 raised by two steps a ratings sub-category at Nordea. The move supports the bank’s senior debt ratings by taking into account cross-border regulatory cooperation, even though there is now less government support behind the debt. Danske received a one-step upgrade for the same ratings sub-category.

Entry Point

Loan losses at Nordea are among Europe’s lowest, leading to a Moody’s stand-alone rating of a3, the third highest. Danske’s baseline credit assessment, which strips out the possibility of extraordinary support from a government or an affiliate, is one step lower.

European-level banking officials are working on improving cooperation among national regulators, particularly as the region implements a common approach to preventing defaults and dismantling lenders.

Nordea and Danske “have highly interconnected group structures and organizations,” Heemskerk said. That makes resolution by a single point of entry more likely to begin with, he said. “But more importantly the established level of cooperation between the Nordic national authorities will enable cross-border resolution.”

And that benefits investors.

“Taking this single point of entry approach into account - - compared to a multiple point of entry where a regulator would be restricted by national boundaries -- there would be a difference,” he said.

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