Denmark Seeks to Pass Too-Big-to-Fail Bank Laws in Parts
Denmark’s government is exploring the option of splitting proposed legislation for systemically important banks into smaller parts to ease its passage through parliament.
After opposition lawmakers refused to back proposals put forward by a government-appointed committee in March, the Business Ministry now says it may need to abandon its goal of pushing a single bill for too-big-to-fail banks through the legislature.
“I’m prepared for the likelihood that we won’t be able to solve all the challenges to do with regulating systemically important financial institutions at this point,” Business Minister Annette Vilhelmsen said yesterday in an e-mailed reply to questions.
The Sifi committee identified Denmark’s six biggest banks, led by Danske Bank A/S (DANSKE) and mortgage lender Nykredit A/S, as systemically important to the $300 billion economy and said they should hold as much as 5 percentage points in extra capital. Yet lawmakers have failed to find common ground over reserve requirements, splitting parliament as banks try to anticipate future regulatory standards.
“There are some fundamental issues around how to treat Sifis in a crisis, meaning that we ought to wait to see the outcome of ongoing talks in the European Union,” Vilhelmsen said. “It’s important that we get started with our Sifi regulation now.”
Opposition lawmakers are questioning the committee’s proposal that Sifis convert debt into loss-absorbing equity once their regulatory buffers breach a 10.125 percent threshold, a level banks say is too high. Parliamentarians have also been split over how explicit Denmark should be in its provision of state guarantees for banks deemed too big to fail.
“The minister is addressing our concerns,” Brian Mikkelsen, business spokesman for the opposition Conservative Party, said in a telephone interview. “She’s moving in the right direction.”
Denmark’s efforts to move ahead with Sifi legislation put it at the forefront of a regulatory drive in the European Union, where such laws have yet to be formulated. It’s not the first time the Nordic nation has moved before the rest of the EU in setting bank laws. In 2010, Denmark became the first EU member to pass a bill ensuring senior bank creditors get bailed in should a lender fail. The industry has argued the legislation damaged its access to funding markets, while the government says it helped protect taxpayers from losses.
Denmark’s Sifis, which also include Jyske Bank A/S (JYSK), Sydbank A/S (SYDB), mortgage lender BRFkredit A/S and the Danish unit of Nordea Bank AB, say they need to be shielded from Danish bail-in laws for their designation to be meaningful. The government and central bank counter that such a step would encourage banks to take greater risks and place too big a burden on the state.
The Social Democrat-led government of Prime Minister Helle Thorning-Schmidt says Denmark needs stricter bank laws to protect it from losses in an industry whose combined assets are about four times the nation’s gross domestic product. Danske Bank alone has assets that are almost twice the size of the Danish economy.
While Vilhelmsen said Sifi proposals may need to be split into several bills, members of the three-party coalition she represents disagree. The Social Democrats and Social Liberals will continue to fight for a single bill, their business committee representatives said.
“I’m hoping we can still come together and agree on a full package,” said Andreas Steenberg, business policy spokesman for the Social Liberal Party. “It’s important to get these rules sorted out together as they set the bar for what Danish banks pay to fund their business. Any lingering uncertainty won’t help anyone.”
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