Denmark Fights to Push Tougher Bail-In Rules in Europe

Denmark is lobbying hard to make sure bondholders don’t get off too lightly in the European Union’s proposed bank resolution framework.

The Scandinavian nation -- which was the first to pass bail-in legislation in 2010, leading to senior bondholder losses less than a year later -- argues the EU’s latest plan still entails a risk for taxpayers that shouldn’t be there.

Economy Minister Margrethe Vestager is now pressing her counterparts in the EU to drive home Denmark’s point that the best way to protect public finances is to have explicit legislation showing bank investors can’t tap them. Denmark’s stable AAA rating, intact even after the nation was dragged through a 2008 housing bubble that wiped out more than 12 regional banks, is proof that effective bail-in legislation shields governments, central bank Governor Lars Rohde said in a speech last month.

Vestager used a visit to Copenhagen by EU Economy Commissioner Olli Rehn last week to plead Denmark’s case. “I told Rehn that, on the next step of the banking union, the issue of bank resolution, we want to nail the Danish bail-in model,” Vestager said in an interview. “If taxpayers should get involved, it must only be to provide temporary funding, which will eventually be repaid.”

Bitter Experience

Denmark’s bitter experience with the Basel Committee on Banking Supervision, whose liquidity rules threaten to destroy the nation’s mortgage market, has taught the Danes to be more aggressive in defending their corner when it comes to cross-border regulatory matters. Denmark, which doesn’t hold a seat on the 27-member Basel committee, now needs to make sure EU policy makers don’t overlook Danish interests, Rohde said.

“The decision on whether to join the banking union rests with the government and the parliament,” Rohde said in an e-mailed response to questions. “This being said, it is Nationalbanken’s recommendation that Denmark seek as much influence as possible on the design of the banking union.”

Rohde argues that can be done more effectively by signing up to a bank union early and trying to affect the framework from within. Vestager says the government won’t agree to anything until they’re sure Danish interests have been safeguarded.

‘Looks Risky’

“We need to have as much influence as we can,” Jesper Berg, senior vice president and head of regulatory affairs at Nykredit A/S in Copenhagen, said in a phone interview. “But it’s very complicated and there are so many things that remain unclear.” Berg, who used to be a director at Denmark’s central bank, warns that “at this point, it looks risky to commit ourselves.”

Denmark’s bail-in legislation was first tested in February 2011, when Amagerbanken A/S’s collapse pushed losses on to senior creditors. It was the first time senior bank bondholders in the EU suffered a so-called haircut in a resolution framework, and the credit event left most Danish lenders shut out of wholesale funding markets.

Yet the Danish government has since published figures showing it’s made a profit of 11.2 billion kroner ($2 billion) on its bank packages. That’s in stark contrast to the losses seen in Spain and Ireland, both now relying on international aid to cover bank industry losses that jeopardized state finances.

Exhausting Bail-Ins

The EU’s latest bank resolution proposal -- one of three main pillars in a banking union that includes a single supervisory authority and common deposit insurance -- would give regulators bail-in powers by 2018. Germany, the Netherlands and Finland want implementation as early as 2015, according to people familiar with the content of technical meetings held in Brussels in January. The proposal allows national authorities to resort to taxpayer-funded bailouts after exhausting bail-in options.

For Denmark, “it’s very important that shareholders are first in line to bear losses and the industry second,” Vestager said.

A single resolution procedure in the EU would ensure “minimum recourse to taxpayers’ money” and is an “indispensable element” of a banking union, Peter Praet, a member of the ECB’s executive board, said in a Feb. 27 speech.

Denmark is fighting for influence as supranational regulatory bodies extend their reach. While work to create global bank standards is meant to prevent a repeat of the financial crisis that started in 2007, Denmark argues that the cross-border rules ride roughshod over smaller economies with well-functioning systems.

Liquidity Downgrade

After watching Basel downgrade the liquidity status of its $600 billion mortgage-backed covered bond industry, potentially forcing banks to dump the securities, Denmark is unlikely to accept more damage to its market.

Vestager says Denmark won’t sign up to a bank union that entails commitments, including common deposit insurance, before her demands have been met. Politicians also fear ending in a situation that could require them to explain to voters why they let a single supervisor under the European Central Bank in Frankfurt shut down a lender inside Denmark’s borders, said Berg.

“There’s a democratic problem,” he said. “How much have people actually said yes to? What kind of opposition will we run into when we pull people into something they think they haven’t said yes to?”