Danske Bank Bonus Culture Investigated as Bond Probe Deepens

Danish police are looking into how Danske Bank A/S’s bonus program might have influenced employees now being investigated for alleged bond price manipulation.

The Public Prosecutor for Serious Economic and International Crime, which on Feb. 7 accused Danske, six of its employees and its home-loan unit of rigging mortgage bond prices in 2009, needs to find out what role the prospect of a bigger paycheck played, Public Prosecutor Hans Fogtdal said yesterday in a telephone interview.

“It’s not apparent from the information that we have now that the employees made the transactions for their own benefit,” Fogtdal said. “But we are looking more closely at the bonus program to see whether it has any bearing on this case, whether the employees benefited from it.”

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

Danske Shares

Danske Bank shares slipped 0.7 percent to 138.90 kroner as of 10:56 a.m. in Copenhagen. The lender’s stock has gained 12 percent this year.

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.

How banks reward their employees has come under greater scrutiny as the gap between financial industry pay and salaries earned elsewhere widens. Barclays Plc, the U.K.’s second-biggest bank by assets, drew criticism last week when it boosted its bonus pool amid a decline in investment-banking profit. The lender also said it will eliminate as many as 12,000 jobs this year after profit fell in the fourth quarter.

Pay Committee

Danske Bank’s board has a committee that monitors salary and bonus policies and practices to ensure programs promote “ongoing, long-term shareholder value creation,” according to the bank’s 2013 risk-management report.

Variable pay at Danske fell last year to 5.9 percent of total salary, compared with 6.8 percent in 2012, according to the bank’s annual report. Variable pay for employees outside the bank’s top management and designated as “material risk takers” shrank to 26 percent of total pay from 39 percent in 2012, the report showed.

Danske hasn’t revealed details on the positions held by the employees who were suspended. Kenni Leth, a spokesman for the bank, declined to comment on how they were remunerated.

The probe, which was unveiled one week 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 Financial Supervisory Authority received notification only a few days before handing the case over to police, according to Fogtdal.

“We are also investigating why the transactions only were discovered now,’ he said.

Monitoring Prices

Danske can’t comment on any aspect of the alleged price manipulation until the results of the police investigation are known, said Leth. Fogtdal said he doesn’t have ‘‘any time horizon yet” for completing the probe.

The bond price manipulation 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 last week. He declined to comment further before the case is settled via the courts.

The Red-Green Alliance, on whose support the minority coalition of Prime Minister Helle Thorning-Schmidt relies to stay in office, will seek tougher rules to ensure bankers can’t rig mortgage bond prices, spokesman Frank Aaen said last week.

Four of the six employees now suspended have worked at Danske for more than 20 years, newspaper Borsen reported last week, 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 Feb. 7. In an e-mailed comment, he said there is “no excuse for not following the rules” that Danske has in place to prevent price manipulation.

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