Brexit Has Euro Outsiders Fearing Banking Fallout, Denmark Says

Britain’s decision to leave the European Union will weaken the ability of the remaining non-euro members to shape financial regulation, according to Denmark’s bank watchdog.

“We’ve lost a heavyweight in our camp,” said Jesper Berg, director general of the Financial Supervisory Authority in Copenhagen. “They’ve always provided intellectual leadership, and they have close contact with a huge financial market, which helps them provide that leadership. That will be something that we’ll miss.”

Jesper Berg
Jesper Berg
Phtoographer: Jon Norddahl/Finanstilsynet

With the U.K.’s departure -- which instantly triggered the resignation of EU financial services chief Jonathan Hill -- the number of countries with their own currencies falls to eight. Banks in the 19-member euro zone are subject to oversight by the European Central Bank and form a banking union that other countries are free to join.

So far, all EU nations that aren’t part of the euro club prefer to stay outside the direct jurisdiction of the ECB, though its reach stretches beyond the common currency union thanks in part to the pursuit of a single rule book for financial institutions under the auspices of the European Banking Authority.

Resolution Fund

Denmark has taken a wait-and-see approach to joining the banking union. Its banks don’t want to contribute to a common resolution fund they fear would be used to shore up troubled lenders in southern Europe.

The ECB also wants to eliminate the more than 150 exceptions to uniform capital requirements that countries have adopted, a move toward standardization that, according to Berg, won’t necessarily benefit countries outside the euro zone.

“Within the euro area, from the center, there is an attempt, which is understandable, to take out national discretions and to harmonize, because it’s difficult to supervise across different national standards,” Berg said. “To the extent that that policy also influences the EU rule-setters, that will present some challenges for us.”

Lord Hill

Denmark’s biggest lender, Danske Bank, says the U.K.’s departure -- and especially Hill’s resignation -- will probably mean the “loss of essential support.” The views of Hill’s replacement, Valdis Dombrovskis, aren’t yet known, according to Jan Oestergaard, an analyst at Danske.

Hill’s strength was a willingness to look at the evidence before imposing rules handed down from the Basel Committee on Banking Supervision, said Karsten Beltoft, the head of the Danish Mortgage Banks’ Federation.

A push for greater integration of Europe’s covered bond markets is of particular concern. Denmark’s $420 billion covered mortgage bond market, the world’s largest, funds virtually all its real estate transactions and is an integral part of the country’s financial system, making up the lion’s share of bank liquidity buffers. Danish lawmakers say they’ll oppose any EU moves that would disrupt the system.

Risk Weights

Denmark, Sweden, Finland and the Netherlands already are fighting global efforts to eliminate differences in bank risk weightings. Proposals by Basel would hit the countries particularly hard because lenders have relatively low weights on mortgages. Danish banks’ capital requirements could rise by some 130 billion kroner ($19 billion), according to industry estimates.

Brexit reinforces a Danish FSA decision to step up its lobbying efforts, Berg said. Denmark isn’t a member of Basel, but has had success in fighting the global supervisor’s proposals. The country got the EU to raise a Basel limit on covered bonds used in bank liquidity buffers.

“We really have to put effort into our international work, be it at the commission level or, to the extent that we can make our views known, at a global level,” Berg said. “When work really begins is when the issues get transferred from Basel to the EU. That’s where we have a lot of resources.”

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