Too-Big-to-Fail Danish Bank Plan Is Positive, Fitch Says

Fitch Ratings said a proposal last week identifying Denmark’s six biggest banks as too big to fail will support the lenders’ credit grades.

Danske Bank A/S, Nordea Bank AB’s Danish unit, Jyske Bank A/S, Sydbank A/S and mortgage lenders Nykredit A/S and BRFkredit A/S were all designated as systemically important financial institutions in a report published March 14 by a government-appointed committee. The banks face as much as 5 percentage points in additional capital requirements.

“More and better capital is clearly positive,” Fitch analyst Jens Hallen said in a phone interview. “We believe there is a high probability that support would be provided.”

Lawmakers now need to negotiate the Sifi 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.

Denmark’s largest lender, Danske Bank, has “capital that is very solid at this time,” Hallen said. “Having more capital, by making the bank safer, should result in cheaper funding costs, all else being equal.”

Yield Eases

The yield on Danske Bank’s five-year senior unsecured debt maturing Feb. 28, 2017, eased four basis points to 1.56 percent as of 1:48 p.m. in Copenhagen, its lowest since Jan. 9, according to composite Bloomberg bond trader prices.

The note’s yield has fallen by almost two-thirds in the past 12 months, after the bank raised more than $2 billion in capital through a new share sale and bond issuance. That’s narrowed the spread to similar notes issued by the Nordic region’s five other large banks, including Nordea.

Denmark’s committee on too-big-to-fail banks also recommended creating a so-called stability fund, financed by the Sifis, to enable bailouts of troubled lenders. The measure would also give the Financial Supervisory Authority more powers to intervene earlier after identifying banks with dwindling capital buffers.

Bail-In Talks

Though the Sifi committee said its proposals won’t preclude bail-ins, the framework it recommends addresses the potential economic risks entailed should a large bank face failure. 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, the committee said.

“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.

Excluding individual solvency requirements, Denmark’s biggest Sifis should hold at least 10.5 percent in equity and all capital should total at least 15.5 percent. Sweden, by comparison, will require its four biggest banks to hold 12 percent core Tier 1 capital by 2015.

“These are most likely to be minimum levels,” Hallen said. “Banks may add a buffer to that, so we don’t think it will be a disadvantage. We also look at what capital levels they have and what their targets are and what they have said in public.”

Excess Cash

All six banks already hold core capital that exceeds proposed levels, some by as much as 3 percentage points. Danske Bank Chief Executive Officer Eivind Kolding said in an interview today he has no plans to issue additional capital to meet the Sifi rules. Sweden’s four biggest banks also exceed their regulator’s minimum capital targets and are using the extra funds to raise dividend payments to shareholders.

“That Sweden has a requirement of 12 percent -- does that make Sweden better than Denmark? No,” said Per Tornqvist, a director of European financial services at Standard & Poor’s. “You have to get into the intricacies of what models are applied, what risk weights are applied.”

Banks may still have to raise more capital depending on the outcome of negotiations over deductions they must make from their capital bases, Hallen said. These include deductions for counterparty risk and insurance subsidiaries and could damp profitability as well as investor returns, he said.

“When we have the full view on the deductions and how they’re accounted for, that’s likely to have a negative impact on the reported capital ratios that we have today,” Hallen said. “I would expect that the banks would probably still retain some more earnings.”

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