Biggest Danish Banks Need $15.4 Billion Buffer to Meet Rules

Denmark’s biggest banks need to hold 85 billion kroner ($15.4 billion) in additional capital to comply with European requirements and to meet national rules for systemically important lenders.

The number, which doesn’t take into account how much banks have already raised, is an estimate provided by the Business Ministry in Copenhagen, Social Democrat lawmaker and business committee spokesman Benny Engelbrecht said today. Denmark’s too-big-to-fail banks won’t be subject to the nation’s bail-in package, according to an agreement struck by lawmakers today.

“The purpose of the deal is to avoid future crises,” Business Minister Henrik Sass Larsen told reporters. “Banks will now be able to handle what happened in 2008 by themselves.”

Under today’s accord, Denmark’s biggest banks will need to hold as much as 3 percent additional capital based on their 2012 risk-weighted assets, compared with a March proposal put forward by a government-appointed committee of 3.5 percent. That means Danske Bank A/S, Denmark’s biggest lender, will be required to hold a smaller buffer than recommended in March.

No Objections

“This deal won’t cause any objections from Danish lenders,” Christian Hede, an analyst at Jyske Bank A/S, said by phone. “The agreement will underpin the status quo.”

Though the standards agreed on are more lenient than those initially proposed, Denmark will be one of the first European Union nations to set requirements for its biggest banks, joining Sweden in creating a regulatory framework before EU rules become binding. Sweden’s four biggest banks must hold at least 12 percent core Tier 1 capital of risk-weighted assets by 2015. The Danish standards, which also allow banks to use hybrid capital, are as high as 13.5 percent. The EU has yet to enforce its rules for systemically important banks.

“Generally the requirements for Danish SIFIs have been watered down compared to the SIFI report from March,” Danske Bank analysts Henrik Arnt and Thomas Hovard said in a note. “Instead, the agreement clearly aims to ensure that Danish SIFIs are treated the same as their European peers once a common European resolution mechanism has been agreed upon and implemented.”

National Comparison

“We’re hearing that the nations we compare ourselves with will set capital levels on par with us or above,” Engelbrecht said in an interview. “It matters who we compare ourselves with as Denmark needs to be part of this group of the highest-rated nations.”

Banks identified as too big to fail in Denmark will have 18 months to start complying with the rules after their designation is official. The complete set of standards on capital requirements will be phased in over a five-year period. The accord sets a June 30 deadline for the Financial Supervisory Authority to name systemically important banks based on specific criteria. The FSA’s decisions will in the future be overseen by a new supervisory board, according to today’s agreement.

Trigger levels determining when a bank’s management loses its freedom to make payouts won’t exceed European recommendations. The accord didn’t specify trigger levels for converting hybrid debt to equity.

Systemic Relevance

Capital levels for the biggest banks will be set according to a lender’s systemic relevance and by then plugging that measure into a quantitative model to derive a buffer size. Both the measurement of systemic relevance and the Sifi scale would be set down in law.

Capital standards for too-big-to-fail banks will comprise an 8 percent minimum requirement of risk-weighted assets, a capital conservation buffer of 2.5 percent and an individual requirement for each systemically important bank, under the accord. That means Denmark’s seven Sifis would hold 11.5 percent to 13.5 percent of capital from 2019.

Individual solvency requirements made by the FSA would come on top of the Sifi buffer under the measure. A counter-cyclical buffer would be placed on top of the capital pillar, according to the accord.

Lawmakers agreed that the criteria show that Danske Bank, Nykredit Realkredit A/S, Jyske Bank A/S, Sydbank A/S, Nordea Bank AB’s Danish unit, BRFkredit A/S and DLR Kredit A/S are systemically important to Denmark’s $320 billion economy.

Danske Capital

Danske may have its capital requirement adjusted in 2017, because no Danish lender can have higher Sifi buffers than equivalent banks in an eight-nation reference group, lawmakers agreed. The nations in the reference group are the U.K., Norway, Sweden, Germany, France, Switzerland, the Netherlands and Austria.

Denmark will adopt a counter-cyclical buffer that’s between zero and 2.5 percent of risk-weighted assets and the Business Ministry will advise the industry on when it needs to apply the additional capital, the accord showed.

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