Denmark Targets Too-Big-to-Fail Bill as Early as This Month
Denmark’s government plans to push through a March proposal that sets out tougher capital standards for its systemically important banks as early as this month.
“We could reach a deal as early as September but there is no deadline,” Benny Engelbrecht, business spokesman for the ruling Social Democrats, said in an interview.
The final bill, which would require Danske Bank A/S and Denmark’s five other biggest banks to hold as much as 5 percentage points in additional reserves, is likely to have opposition backing, Engelbrecht said. Once parliament’s business committee agrees on the wording of the legislation, the bill’s passage into law is a formality.
The drive is the latest example of Scandinavian legislators moving faster on bank regulation than the rest of Europe as near record-low interest rates distort credit and housing markets in some of the world’s richest economies. In Sweden, the four biggest banks must hold at least 12 percent core Tier 1 capital of risk-weighted assets by 2015, a target Norway’s largest lenders must meet by 2016. The European Union has yet to enforce rules for systemically important banks.
“A deal may be reached by September, though travel obligations could postpone it into October,” Brian Mikkelsen, business spokesman for the opposition Conservative Party, said in an interview. “Either way, the deal will be closed and this can pass into law by the end of the year.”
The opposition had earlier this year sought to block the March proposals for Denmark’s biggest banks arguing the recommended capital requirements would hamper lending. Lars Rohde, governor of Denmark’s central bank and the head of the country’s Systemic Risk Board, has repeatedly rejected claims that higher capital burdens on their own hurt banks’ ability to lend.
Too-big-to-fail talks had been hampered by disagreement over trigger levels at which bank debt converts to equity and at which management loses its freedom to dish out dividends and bonuses.
The Financial Supervisory Authority said yesterday Danish lenders will be allowed to use contingent convertible bonds to help build their regulatory reserves. The watchdog set a 7 percent core Tier 1 capital conversion trigger, a level it said matched thresholds elsewhere in Europe, including Switzerland and the U.K.
That’s well below the 10.125 percent conversion trigger Denmark’s government-appointed committee on systemically important financial institutions recommends be applied to the country’s biggest banks.
Like Sweden’s biggest banks, the largest Danish lenders have combined assets that are about four times the nation’s gross domestic product. Danske Bank alone has assets that are more than 180 percent of GDP. The banks’ size justifies the stricter requirements, according to the government’s Sifi committee.
Switzerland named and regulated Sifis in 2011, as UBS AG (UBSN) and Credit Suisse Group AG (CSGN), which account for 31 percent of Swiss lending, were asked to hold 3 percent additional equity, according to a document published by the Danish government. France, Germany, Norway, the Netherlands and the U.K., who are working on similar legislation, haven’t yet identified Sifis or set capital buffers,
Engelbrecht has argued the financial industry is better served with a clear set of rules and doesn’t need a lengthy debate on how best to treat systemically important lenders. That supports the need for swift passage of Sifi legislation, he said.
Shares in Danske Bank declined as much as 1.5 percent and fell 0.4 percent to 114.30 kroner as of 2:45 p.m. in Copenhagen.
Danske Bank (DANSKE) and mortgage lender Nykredit Realkredit A/S have criticized the thresholds in the Sifi proposals, arguing the recommended triggers will make convertible securities too expensive to use, ultimately restricting banks to pure equity.
Lawmakers signaled that the final Sifi bill may yet differ from the original proposals in the March proposals.
According to Mikkelsen, the chances of a Danish Sifi agreement have grown brighter since Social Democrat Henrik Sass Larsen replaced Socialist People’s Party Annette Vilhelmsen as business minister last month.
“He seemed sympathetic to striking a deal with our side,” Mikkelsen said.
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