Danske Expansion Singled Out in Report on Denmark’s Crisis

Danske Bank A/S’s international ambitions in the years leading up to the financial crisis put the stability of the entire Danish economy at risk, according to a government-commissioned report.

The report, published today by the Business Ministry in Copenhagen, singled out Denmark’s largest bank, arguing Danske’s expansion into Ireland at the height of its housing bubble fueled unsustainable gearing and a reliance on capital markets.

While Danske met its solvency requirements, “there is still no doubt that the bank put itself in a vulnerable position that, given the bank’s size, would have shaken financial stability in Denmark if the risks had materialized,” the report said.

Denmark’s banking industry has shrunk by more than one-third in the past five years as a burst property bubble sent impairments soaring and wiped out regulatory capital. The shock was exacerbated after Denmark became the first European Union nation in 2011 to enforce bail-ins on senior creditors in its failing banks. Denmark’s lax fiscal policy in particular contributed to the imbalances, the report said.

Denmark, which has been ahead of the EU in pushing its bank resolution framework and designing requirements for systemically important banks, can’t afford to bow to pressure to ease its oversight, the crisis committee said.

Irish Ambitions

Danske expanded into Ireland in 2005 under then Chief Executive Officer Peter Straarup. He was replaced by the former head of A.P. Moeller-Maersk A/S’s shipping line, Eivind Kolding, in February 2012. Danske Chairman Ole Andersen fired Kolding this week, arguing Danske needs a more experienced banker. He was replaced by Thomas Borgen, a member of the executive board who has responsibility for corporate and institutional banking.

Some lenders may still need bigger capital buffers than those recommended for too-big-to-fail banks to avert another financial crisis in Denmark, according to the report.

“One of the lessons of the crisis is that tighter regulation and oversight is essential,” the report said. “It’s is one of the committee’s concerns that pressure will build to ease the tightening that is underway to secure robust financial institutions, including capital and liquidity requirements.”

Lax Regulation

Lax regulation by the country’s Financial Supervisory Authority and central bank exacerbated the losses inflicted on Denmark’s housing and banking markets following the 2008 failure of Lehman Brothers Holding Inc., according to the report. Jesper Rangvid, a finance professor at the Copenhagen Business School and the report’s main author, attached 18 recommendations to the study to help Denmark avert future crises.

Denmark needs an expert group to determine whether there’s a need for a higher leverage ratio than the 3 percent contained within Basel III rules, the committee said. That could result in higher capital requirements for banks than those recommended in March for the country’s too-big-to-fail lenders and would also exceed minimum requirements under European capital rules.

Denmark suffered a systemic banking crisis after the 2008 collapse of Roskilde Bank A/S, an event that triggered considerable losses, writedowns and liquidity shortages, according to the report. Rangvid concluded that unlimited state guarantees on deposits prevented an outright run on the banks. Still, the crisis was so severe that 62 lenders closed in the five-year period through August 2013.

Risk Weights

The committee also recommended that banks using internal models to assess asset risk publish what their capital levels would be if they used standard risk-assessment models.

Existing regulations allow risk weightings that can be “too low,” the committee said.

The FSA should also tighten limits on the amount banks can lend to a single customer, and banks need to be more aggressive in ascertaining clients’ credit worthiness, according to the report.

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