Denmark Defends Toughest Bail-Ins as EU Deal Readings Vary

Denmark isn’t planning to soften its stance on bail-ins after the European Union struck a deal on bank resolution that leaves room for national interpretation.

The first EU nation to enforce losses on senior creditors in bank failures won’t back down from a law passed in 2010 that ensures taxpayer funds aren’t tapped to aid failing banks, Economy Minister Margrethe Vestager said.

“The EU proposal will not change Denmark’s bank resolution legislation or the conditions for bail-ins in Denmark,” Vestager said yesterday in a phone interview after returning from all-night talks in Brussels. “It will not make the road to receiving a bailout any easier in Denmark.”

EU finance ministers reached a compromise deal yesterday setting guidelines for assigning losses to private bank creditors. The text of the agreement still gives governments the option to nationalize banks to preserve financial stability. Danish banks, led by Danske Bank A/S, have argued the country’s bail-in legislation puts them at a disadvantage to competitors in neighboring Sweden, where creditors can expect state backing.

“Our interpretation of the compromise is that for countries that wish so -- and can afford it -- it would be possible to make a recapitalization of a distressed bank without imposing a bail-in on creditors,” Danske Bank chief analysts Henrik Arnt and Thomas Hovard wrote in a note. “The compromise is positive for Swedish banks as it seems authorities will keep their flexibility in times of distress.”

Danske Bond

The yield on Danske Bank’s 5.6838 percent junior subordinated hybrid note rose four basis points to 7.44 percent as of 12:46 p.m. in Copenhagen, according to data compiled by Bloomberg. Danske shares dropped as much as 0.9 percent.

Vestager had sought to ensure Denmark’s bail-in model was adopted across the EU, arguing that failure to enforce a hard line will compromise public finances and distort competition.

Germany, Denmark and the Netherlands had pursued a tough stance while Sweden and France argued in favor of a compromise that grants national regulators more freedom to rescue their lenders.

“Both the French and the Germans seemed genuinely happy about the compromise,” Vestager said. “We’ve created a clear-cut hierarchy among those funds eligible for bail-ins while giving the larger depositors more protection. That should send a clear and transparent message to those who fund banks.”

Copy Denmark

Vestager expects other nations to copy Denmark’s model “per default,” she said. “It will create a level playing field for Danish banks.”

According to Danish central bank Governor Lars Rohde, “the agreement is a major step toward a more credible resolution scheme, where the use of state funds is limited and fenced in,” he said in an e-mailed reply to questions. “This creates the foundation for a more even competitive climate than is the case today.”

In seven hours of emergency negotiations in Brussels that started June 26, finance chiefs also spelled out when governments can step in and established a role for the European Stability Mechanism, the euro area’s 500 billion-euro ($651 billion) firewall fund.

Denmark has managed to preserve its stable AAA rating even after a burst housing bubble and a spate of regional bank failures. Gross domestic product in the $320 billion economy stalled in the first quarter as investment and government spending sank, the statistics office said today.

Moody’s Take

Moody’s Investors Service said this month Denmark’s commitment to bail-ins is key to protecting its top credit grade, which it shares with only five other nations in the 27-member EU.

Denmark’s systemically important banks, led by Danske Bank and mortgage lender Nykredit Realkredit A/S, will be required to hold as much as 5 percentage points in additional capital if lawmakers back a March proposal. Danske Chief Financial Officer, Henrik Ramlau-Hansen, said last month Denmark should copy Sweden, where too-big-to-fail designation comes with an explicit promise from the government to bail the banks out.

The EU accord leaves nations the option to take stakes in their systemically important banks, Swedish Finance Minister Anders Borg said. “There is a reasonable degree of flexibility when it comes to injecting capital into banks.”

According to Christian Hede, a banking analyst at Jyske Bank A/S in Silkeborg, “as long as the Swedish banks can rely on some sort of state rescue, the playing field won’t be entirely even.”

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