Too-Big-to-Fail Banks Won’t Get State Backing in DenmarkFrances Schwartzkopff and Peter Levring
Denmark’s government isn’t planning to support banks deemed too big to fail and will instead require lenders to hold enough extra capital to protect taxpayers from another banking crisis.
“The too-big-to-fail designation means they need to ensure they have the extra capital buffers, not that the state will bail them out should they get into trouble,” Benny Engelbrecht, head of the parliament’s business committee overseeing bank industry legislation, said in a phone interview yesterday. “It’s of principle importance to this government to protect taxpayers.”
Bond investors have demanded a premium from Danish banks since the Nordic country in 2011 became the first in Europe to enforce a resolution framework that pushed losses onto senior creditors. At Danske Bank A/S, Denmark’s largest lender, Chief Executive Officer Eivind Kolding told investors in November that becoming a systemically important financial institution will help support the bank’s rating.
A lawmaker-appointed panel is due to present its recommendations on Denmark’s Sifis by March. The proposals will include a list of which banks should be deemed too big to fail and how much extra capital they must hold. It will also address the need for living wills that would work as roadmaps for orderly resolution.
“The intention is that taxpayers never have to put money toward a bank bailout,” Engelbrecht said. “The model here in Denmark is that the banks provide the funds that might be needed to support the sector, corresponding to 1 percent of the industry’s insured net deposits.”
Should the amount needed to support banks exceed the reserves set aside by the industry, then any state funds used to make up the difference would be reclaimed by requiring banks to pay until taxpayers are reimbursed and the 1 percent buffer of insured net deposits is restored, Engelbrecht said.
Shares in Danske Bank fell as much as 2.1 percent and traded at 106.50 kroner as of 10:32 a.m. in Copenhagen, leaving the stock the worst performer in Denmark’s benchmark C20 index. Jyske Bank A/S lost as much as 1.2 percent.
A proposed European bank resolution and recovery directive, adopted by the European Commission in June, has yet to be agreed on. Benoit Coeure, executive board member of the European Central Bank, said Jan. 18 the region needs to move forward “as soon as possible” on deciding the issue. Michel Barnier, the European Union’s financial services chief, meets with Europe’s Council of Economic and Finance Ministers today.
Denmark’s resolution agency has taken over a dozen banks since the country’s housing bubble burst in 2008, with senior creditors in regional lenders Amagerbanken A/S and Fjordbank Mors A/S suffering losses.
Stress tests conducted by the European Banking Authority and the central bank to date have singled out Danske, Nykredit A/S, Jyske Bank A/S and Sydbank A/S as having systemic importance to Denmark’s financial health.
“All Danish financial institutions that might be affected by the Sifi rules are on the right side, and by quite a margin, of what we expect them to deliver in extra capital buffers,” Engelbrecht said. “So I don’t see it as a challenge for them.”
The stance won backing from JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon this week, who said regulators and banks should develop a system to let lenders go bust without damaging the world economy to help restore trust in the industry.
“We’ve got to get rid of too big to fail,” Dimon told clients of the bank during a panel discussion in the German town of Koenigstein late yesterday. “We have to ensure big banks can be taken down without harming the public and at no cost to them.”
Danish banks already face new requirements to hold as much as 18 percent, including capital conservation and countercyclical buffers, according to the Financial Supervisory Authority. Additional capital demands facing Sifis could bring that ratio as high as 21 percent of risk-weighted assets.
“There will be additional capital requirements that ensure these banks have enough reserves to support their too-big-to-fail status,” Engelbrecht said.