Too-Big-to-Fail Banks in Denmark Hit by Bail-In Reality Check

Demands by Denmark’s biggest banks that they be excluded from the nation’s bail-in legislation are out of step with reality, according to the country’s central bank.

“A wish for more explicit government guarantees would be rather uniquely Danish,” Per Callesen, deputy governor of Denmark’s central bank, said yesterday in an interview in Copenhagen. “I haven’t heard indications from elsewhere that this would be the preferred route to go down.”

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.

Moody’s Investors Service said in April that 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 gives Danske Bank a Baa1 grade, 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.

The Swedes

“What we say is not that different from what the Swedes say,” Callesen said. They “insist that banks must be very well capitalized, further than we’ve contemplated. If banks want to compare to Sweden they should acknowledge the size of the Swedish capital requirement.”

The March proposals require Denmark’s biggest banks to hold at least 10.5 percent in core Tier 1 capital of their risk-weighted assets. Sweden’s four biggest banks need to hold at least 12 percent from 2015.

Denmark’s banks have also argued the government’s goal of pushing ahead with its too-big-to-fail regulatory framework before the European Union has formulated common standards will put them at a competitive disadvantage. According to the central bank, the country can’t afford to wait any longer.

“Denmark needs to move quickly on regulating Sifis as Denmark won’t be the first mover,” Callesen said. “The U.K., Switzerland and Sweden already moved ahead and, like these countries, Denmark has a very large and particularly concentrated banking sector.”

Oversized Banks

Denmark’s bank industry has assets that are about four times its gross domestic product. Danske Bank alone has a balance sheet that’s almost twice Denmark’s $300 billion GDP.

Callesen also rejected industry warnings that stricter capital requirements will restrict the flow of credit to businesses and households and hurt Denmark’s recovery. The economy contracted 0.7 percent in the final quarter of last year, according to the latest set of gross domestic product data published by the statistics office.

“It’s not at all certain that there is a future negative short-term impact,” Callesen said. “Given what we’ve learned since the crisis, it’s pretty obvious that banks with high capital levels have lower funding costs and less demand from owners for returns.”

Lowering bank taxes or redesigning the deposit insurance fund are better ways of saving banks money than reducing capital requirements, the central bank said in a May 22 analysis, echoing a recommendation by the International Monetary Fund.

IMF Proposal

The IMF said in December Denmark should consider introducing risk-adjusted deposit insurance premiums. The government has said it wants to raise banks’ payroll taxes to counter a proposed reduction in the corporate tax rate.

The central bank, which served on the Sifi committee, is speaking out ahead of a May 29 meeting arranged by the industry to persuade lawmakers to stop Denmark imposing stricter capital rules than the rest of Europe.

The business ministry is still drafting enabling legislation that’s now in consultation with lawmakers. Central bank Governor Lars Rohde urged Business Minister Annette Vilhelmsen in the May 22 letter to adopt the proposals as soon as possible, calling claims that the requirements would drive bank costs higher “a bad argument.” More capital will reduce the risk of financial crises, he said.

“Anybody arguing that raising capital requirements would raise funding costs -- they have the heavy burden of proof,” Callesen said. “There are no good reasons why this should limit future lending.”

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