Too-Big-to-Fail Danish Banks Seek Bailout Text in Sifi Law

Denmark’s biggest banks want the state to clarify its readiness to bail them out.

The six lenders identified by a government committee as systemically important for the Danish economy say they need to be shielded from the country’s bail-in legislation for their too-big-to-fail designation to be meaningful. Danske Bank A/S, Denmark’s biggest lender, argues the additional capital costs they face should be matched by explicit guarantees of state support, just like in neighboring Sweden.

“We are very concerned about the fact that the legal wording is different to the extent that our rating is suffering,” Danske Chief Financial Officer Henrik Ramlau-Hansen said yesterday in an interview.

Moody’s Investors Service said last week that March proposals naming Denmark’s systemically important financial institutions and their capital requirements won’t prompt ratings upgrades. The banks will continue to get only one notch in Moody’s systemic support analysis. Swedish banks enjoy three notches. The rating company grades Danske Baa1, compared with an Aa3 rating for Nordea Bank AB of Sweden. Danske says the lower rating adds to funding costs at a time when they’re being asked to raise additional capital.

Default Costs

Danske Bank estimates it will need to hold 17.6 percent of risk-weighted assets in capital by 2022 to meet the Sifi requirements, according to its first-quarter presentation. The bank’s regulatory capital was 21.6 percent as of March 31, including 3 percent state hybrid debt.

Investors pay about 55 basis points more to insure against a default on senior unsecured debt sold by Danske Bank versus similar contracts on Nordea, according to five-year credit-default swap data compiled by Bloomberg.

“Moody’s says there are only further demands on the banks and no benefits,” Steen Nygaard, head of group treasury at Jyske Bank A/S, Denmark’s second-largest listed lender and a designated Sifi, said in an interview. “‘Maybe, maybe not. But we regard it as a kind of implicit guarantee, an agreement between the banks and the government.”

The government may want to avoid making support explicit because “then it would become a liability,” Nygaard said. “But for the banks, it would be indisputably a good thing to go in the direction of an explicit guarantee.”

Bail-In Impact

Danish banks have struggled to persuade investors they’re as safe as their Swedish rivals after Denmark became the first European Union country to force losses on senior bank creditors within a resolution framework. The 2011 failure of Amagerbanken A/S left most banks in Denmark locked out of funding markets as creditors shunned the nation’s bail-in legislation.

Danske bank Chief Executive Officer Eivind Kolding told investors in November he expected the bank’s Sifi status to lift its credit rating, arguing Denmark wouldn’t force bail-ins on banks deemed too big to fail.

The proposals, which have yet to be passed by lawmakers, seek to raise capital requirements by as much as 5 percent and make Sifis subject to greater scrutiny from regulators. The measures will help protect taxpayers from losses should a Sifi get into trouble, according to the committee. Proposals include giving the Financial Supervisory Authority the power to stop dividends, fire board members and restrict interest payments on capital debt instruments.

No Guarantee

“The committee felt that the state shouldn’t give a guarantee, binding for all future, completely independent of the situation,” Michael Moeller, chairman of the Sifi committee, said in an e-mailed response to questions. “As far as I remember, Sweden is the only country that has given such a strong guarantee.”

Denmark’s banks argue such a stance has left them with the costs and none of the benefits of too-big-to-fail designation. Since being named a Sifi in March, mortgage lender BRFKredit A/S hasn’t seen any decline in its funding costs, according to Sven Blomberg, chief executive officer at the bank.

“We should have seen it already, if that were the case,” he said yesterday by phone.

“It is especially Moody’s that treats the government support differently,” Ramlau-Hansen said. “We would like the government in its final deliberations and response to actually make a statement that if some of the other resolution mechanisms do not work, they would not rule out putting money in the banks, like they have in Sweden.”

Lawmaker View

Benny Engelbrecht, who heads Denmark’s parliamentary committee on bank laws, said he’s unlikely to back proposals that move away from Denmark’s practice of bailing in unsecured bank creditors. That stance also applies to systemically important banks, he said.

“We won’t back giving Danish Sifis explicit government support,” he said in an interview yesterday. Denmark’s financial industry assets are almost four times the size of the $300 billion economy.

According to Moeller, investors should look to the fact that the Danish government has the means help its banks should the need arise.

“The fact that the Danish state has the strength to support its banks should weigh something,” he said. “Some European countries have, and may in the future have even further, problems saving their banks, as we have seen in Cyprus.”

Debt Triggers

Denmark’s biggest banks also want lawmakers to lower triggers for regulatory intervention and for converting debt to equity to boost loss-absorbing reserves. Under the current proposal, debt would convert to equity when the underlying equity falls below 10.125 percent of risk-weighted assets.

Investors will demand such high returns for the conversion risk that the securities will be too hard to sell, forcing banks to resort to equity instead and limiting their ability to lend, according to Bjarne Larsen, head of finance at Sydbank A/S, Denmark’s third-largest listed lender.

“Those are the two most important issues,” Larsen said yesterday by phone. “Moody’s was pretty clear about the Sifi proposal. It wouldn’t change their view on the Danish banking sector, and that’s because of the way the language is.”

Danske Bank, the Danish unit of Nordea Bank AB, Jyske Bank, and Sydbank A/S, and mortgage lenders Nykredit A/S and BRFkredit should all be named Sifis, the committee said. It also suggested considering DLR Kredit A/S as too-big-to-fail because of its dominant role in mortgage lending to farmers.

Engelbrecht said lawmakers are ready to consider lower regulatory triggers. Winning any more concessions is likely to prove difficult, given the “public and political resistance that the public should take any sort of risk,” Blomberg at BRFKredit said. “That’s going to be very difficult to overcome for the next couple of years.”

Before it's here, it's on the Bloomberg Terminal.