Banks on Verge of Collapse in Denmark Win Time in FSA Review

Danish banks in breach of the nation’s solvency rules will get more time to raise capital and avert failure as the regulator eases its resolution practices.

The Financial Supervisory Authority will give two banks currently in breach of individual solvency requirements the time they need to rebuild their capital buffers, said Anders Balling, head of banking at the regulator in Copenhagen. At the height of Denmark’s banking crisis two years ago, the FSA gave lenders as little as 48 hours to find investors before they were shut down.

“We have moved away from an either-or model,” Balling said in a telephone interview. “We can see the benefits of a gradual approach. This is also part of the thinking in the new European capital requirement rules.”

Denmark’s FSA has enforced some of the European Union’s toughest bank rules, leading the bloc in requiring senior creditors to share losses since 2011. The financial industry has criticized the approach, arguing it risked deepening the nation’s economic crisis. Denmark is the Scandinavian country hardest hit by the turmoil in the euro zone as it struggles to emerge from a 2008 property bubble and an ensuing spate of regional bank failures.

“With the most challenged banks, the thinking is that in the current climate, with the macro-economic climate not so good -- but not so drastically bad -- there is room for working with this,” Balling said.

Creditor Losses

The Danish regulator requires banks to calculate individual solvency needs to determine bank-specific capital buffers. The approach is known in Denmark as the 8+ model, referring to the additional reserves banks must hold over an 8 percent minimum, relative to their risk-weighted assets.

At least 12 Danish banks have been shut down since 2008 for breaching solvency rules, while another dozen were absorbed by stronger rivals. After the 2011 failure of Amagerbanken A/S -- the EU’s first bail-in within a resolution framework -- the FSA stepped up its efforts to catch banks holding what it described as an “optimistic” view on risky assets.

The watchdog started conducting surprise Friday afternoon inspections, giving troubled banks a weekend to find the capital they needed to escape insolvency. Failing that, a lender was declared insolvent and either wound down or taken over.

Funding Crisis

Extending deadlines to meet capital requirements should help avert a repeat of the funding crisis that hit Denmark’s banks after 2011, said Mads Thinggaard, an analyst at Nykredit A/S. Following two bail-ins that year, most of Denmark’s regional lenders were shut out of wholesale markets.

“It wouldn’t be a good thing for Danish banks to get into that same situation again,” Thinggaard said. “As long as you have real hope for saving a bank in a way that means no losses to simple creditors, it makes good sense for the industry, and also for the Danish banking customers, that you give them a chance to play out the rescue possibilities.”

FSA General Director Ulrik Noedgaard said in November the FSA was considering extending the weekend deadline to as long as three months, pending the outcome of a review. The agency now finds an open-ended timeline more appropriate, Balling said.

Now, “there is no time limit as such,” he said. “We can set a limit if, for instance, there is an increased risk. But as long as the bank is working constructively with decreasing risk and increasing capital, we will give them time.”

Recovery Plans

The regulator in February told Basisbank A/S to submit a capital recovery plan after it failed to meet a solvency requirement of 10.3 percent of risk-weighted assets. A month later, it told Vorbasse-Hejnsvig Sparekasse to submit a similar plan for falling short of its 14.8 percent individual requirement.

The FSA also warned the banks they would face higher requirements as of April 1 when a transition period to the 8+ model ended. Recovery plans need to include consideration of raising equity, issuing debt instruments and reducing riskier assets, according to the regulator’s website. They also must address the sale of branches or business and mergers.

“It’s positive that they don’t close banks when they don’t fulfill pillar 2 requirements, as they used to,” said Morten Frederiksen, a director at the Danish Bankers Association. “It is more aligned with the rest of Europe, and that’s very important for Danish banks.”

The laxer stance comes as Denmark discusses how to treat systemically important financial institutions. The government-appointed Sifi committee in March proposed designating the nation’s six largest banks, including Danske Bank A/S and mortgage lender Nykredit A/S, as too big to fail.

Intensified Scrutiny

The status carries with it additional capital requirements as high as 5 percent of risk-weighted assets. Though the proposal opens the door to state support, banks have argued the text isn’t explicit enough on this point. The industry also wants loosened the proposed conditions for issuing debt to meet the higher capital levels, to ensure investor interest. Lawmakers have yet to agree on the recommendations.

While the Danish banking industry generally is “robust,” the FSA has placed a small group of lenders under intensified scrutiny because of their risk of failure, Noedgaard said in October. The group makes up 2.3 percent of the industry’s total assets and 3.2 percent of loans, he said.

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