Danske Bank Price Fixing Probe Fuels Calls for Tougher Rules

A probe into bond price fixing at Danske Bank A/S has prompted political calls for an overhaul of regulatory standards with a view to enforcing tougher rules.

Denmark’s public prosecutor last week accused the country’s largest financial conglomerate, six of its employees and its home-loan unit of manipulating mortgage bond prices in 2009. The probe, which began days before a statute of limitations was due to take effect, started after Danske alerted the regulator to suspicious trades caught in an internal audit.

The Red-Green Alliance, which provides the minority coalition government of Prime Minister Helle Thorning-Schmidt with the votes it needs to stay in power, says it will seek answers as to why it took Danske Bank’s internal audit almost five years to come across the alleged cases of price fixing. The party will also seek assurances that more people weren’t involved than the six being investigated, according to spokesman Frank Aaen.

“The case underscores that it’s not enough to have firewalls, but that there’s a need for a division like there used to be, in which banks and mortgage lenders were kept separate,” he said in an e-mailed reply to questions.

The alleged misdeeds were designed to drive bond prices higher, making client redemptions more costly, according to the public prosecutor. The trades in question date back to the darkest hours of the global financial crisis, after the 2008 failure of Lehman Brothers Holding Inc. sucked liquidity out of most markets. The Danske Bank probe raises questions as to how widespread the practice of price fixing was, lawmakers said.


The case looks to be “precedent-setting” and the government is “following it closely,” Benny Engelbrecht, a spokesman and lawmaker for the ruling Social Democrats, said in an e-mailed reply to questions. He declined to comment further before the case is settled via the courts.

The opposition Danish People’s Party, the third-largest in the parliament, may ask the legislature to pursue stricter bank regulations to avoid a repeat, Hans Kristian Skibby, a member of the parliament’s business committee, said in an e-mail.

“This case is making us consider whether current rules for internal revision are sufficient, especially at the largest banks,” he said. “The case leaves us with the impression that current rules are lacking.”

Government Review

His party is waiting for a review by Business Minister Henrik Sass Larsen, he said. The Business Ministry declined to comment until its review is published. Larsen told Borsen this week he would consider seeking stricter rules if the outcome of the probe revealed a need to do so.

Denmark’s $550 billion mortgage bond market is the world’s largest per capita and more than 1 1/2 times the size of the economy. Consumers and businesses in the Nordic nation finance their home loans using bonds. Danske’s home-loan unit Realkredit Danmark A/S is the country’s biggest provider of bond-backed home loans after Nykredit Realkredit A/S.

Public Prosecutor Hans Fogtdal, who is heading the Danske investigation, said this week the department of economic crime may need to broaden its probe. Police said Feb. 7 the alleged manipulation took place “under particularly aggravated circumstances.”

‘No Excuse’

Danske has suspended all six employees being investigated. They face a maximum of four years in prison if found guilty, Fogtdal said.

Four of the six employees have worked for more than 20 years at Danske, newspaper Borsen reported today, without saying how it obtained the information.

The bank, whose assets are equivalent to about 180 percent of Denmark’s gross domestic product, is cooperating fully with police, Chief Executive Officer Thomas Borgen said last week. In an e-mailed comment, he said there is “no excuse for not following the rules” that Danske has in place to prevent manipulation.

Fogtdal said the Danske employees being investigated seem not to have executed the suspicious trades for personal gain.

Before it's here, it's on the Bloomberg Terminal.