Denmark’s Too-Big-to-Fail Banks Face Up to 5% Capital Add-On
Denmark’s biggest banks will need to hold as much as 5 percent additional capital as the Nordic nation looks for ways to protect its economy from financial industry losses.
Danske Bank A/S (DANSKE), Nordea Bank AB (NDA)’s Danish unit, Jyske Bank A/S (JYSK), Sydbank A/S (SYDB) and mortgage lenders Nykredit A/S and BRFkredit A/S were all designated as systemically important financial institutions in a report published today by a government- appointed committee. The banks face 2.5 percentage points to 5 percentage points in additional capital requirements, according to the report.
“The larger we set the capital requirement, the lower the risk of government having to provide a bail-out,” Michael Moeller, chairman of the Sifi committee, said at a press briefing in Copenhagen today. The requirement for more share capital “is an incentive for shareholders to be on top of banks,” he said.
Lawmakers now need to negotiate the recommendations, with the opposition Conservative Party already signaling it will fight to reduce the additional capital buffer. The nation is imposing stricter standards on its biggest banks after a property crisis wiped out more than 12 regional lenders since 2008, plunging the economy into a recession.
“The capital requirements laid out in the report will lead to interest rates increasing and banks cutting lending, so they’ll have to change,” said Brian Mikkelsen, a Conservative parliamentary committee member. “Our concern is that banks won’t be able to facilitate the lending needed for the economy to grow and that Danish banks won’t operate on a level playing field with foreign peers.”
Denmark’s Sifi capital requirements will be added to minimum standards set by the Basel Committee on Banking Supervision and would equal those demanded by Sweden, according to today’s report.
The committee also recommended creating a so-called stability fund, financed by the Sifis, to enable bailouts of troubled lenders in future and giving the Financial Supervisory Authority more powers. The agency would intervene earlier, when a capital threshold of 10.125 percent is breached, rather than the current 8 percent limit, according to the report.
“It’s difficult to find any alternative to a state rescue if one of the really big financial institutions should get into trouble,” central bank Governor Lars Rohde said in a statement today. “That’s an issue that the report addresses.”
Denmark’s bail-in legislation, the first of its kind in Europe and the model for European laws still being discussed, is inadequate and risks hurting the economy if a Sifi is wound down under the framework, the committee said in its report.
“To protect the economy, it will be necessary to allow systemic functions of a Sifi in distress to keep operating, rather than winding up the entire institution,” it said. The alternative of finding a buyer is “very uncertain,” it said.
The list of too-big-to-fail banks released today “can still change,” Stig Nymann, an analyst at Alm. Brand A/S, said by phone. “I don’t think the list will become shorter, but it could become longer.”
The recommendations place too high requirements on Danish lenders given their size, according to Jesper Berg, senior vice president and head of regulatory affairs at Nykredit.
“The Danish banks are being treated like the JPMorgans of the world,” Berg, who’s based in Copenhagen, said.
The recommendations are “tougher than we had anticipated on the capital side,” Peter Rostrup-Nielsen, executive vice president for group risk management at Danske Bank, said by phone. Denmark is “again ahead of the curve compared with our peers when it comes to having a specific framework for Sifis.”
Still, Danske is “more or less there already” and will maintain its plan to pay dividends as early as this year, Rostrup-Nielsen said. “Our capital targets are more or less in sync with what this report would require.”
Danske, which hasn’t paid a dividend since 2007, had a core Tier 1 capital ratio of 14.5 percent, excluding hybrid capital, and a total capital ratio of 21.3 percent at the end of 2012.
Countries that have yet to identify and determine capital demands for their Sifis may well opt to set lower requirements than Denmark, Joergen Horwitz, head of the Danish Bankers Association, said.
“It is important for us to secure that our banks remain competitive,” he said by phone.
All the Sifi banks had capital in the fourth quarter that exceeded the proposed requirements by varying degrees, according to the report. Proposed changes in the risk weighting of assets by European regulators could alter that, the report said.
The changes may lower Danske Bank’s core capital by 2 percentage points and Jyske Bank’s by 0.2 percent to 0.5 percent, the report said.
Jyske Bank rose as much as 1.4 percent in Copenhagen trading while Sydbank gained as much as 1.2 percent. Nordea, which has its primary listing in Stockholm, rose as much as 3.1 percent. Danske Bank strengthened as much as 0.9 percent. Nykredit and BRFkredit are unlisted.
“A Sifi stamp will be positive,” Merete Poller Novak, head of strategic funding at Jyske, said before the announcement. “We are already living up to the expected requirements but we won’t see any upside until we get the official stamp.”
Denmark’s economy contracted 0.9 percent in the fourth quarter from the third as consumers spent less and business investment stalled. The nation is still trying to surface from a housing bubble that burst in 2008, sending property prices plunging more than 20 percent from their peak a year earlier.
The biggest banks should have buffers of 15.5 percent of risk-weighted assets while smaller Sifis should hold 13 percent, according to the report. That compares with 10.5 percent under Basel and 15.5 percent in Sweden, the Danish Sifi committee said.
“The Sifi requirements aren’t as strict as some might have feared,” Nymann said. “There had been talk about adapting Swedish levels. As far as can see, however, the requirements are less strict than in Sweden and also less strict than in other European countries like the U.K. and Switzerland.”
The committee recommended that, for larger banks, the first 10.5 percent of their capital requirement be met using equity. Basel sets a minimum requirement of 7 percent, while Swedish banks must hold 12 percent in equity by 2015.