Danske Bank Blames Bail-In Confusion for Debt Sale Stalemate

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The chief financial officer of Danske Bank A/S says a lack of clarity around a key piece of regulation is making it impossible to plan issuance to meet new requirements.

The confusion centers on a buffer specifically designed to prevent bank bailouts. MREL -- a minimum requirement for own funds and eligible liabilities -- forms a key element in Europe’s Bank Recovery and Resolution Directive. It’s supposed to be big enough to absorb losses and ensure that banks have enough of a buffer to be wound down or recapitalized without disrupting the financial system.

But there’s no uniform approach among regulators across Europe to interpreting MREL requirements, making it hard to know what kind of liabilities banks need to issue to be compliant, said Jacob Aarup-Andersen, Danske’s CFO. In Denmark, Danske’s home market, the regulator is still figuring out how to proceed.

“If we had a uniform solution emerging across Europe, it would be easier for me to say obviously we are going this way, but we’re seeing a number of schools forming out there,” Aarup-Andersen said in an interview.


While MREL is a Europe-wide requirement, the particulars are left to national governments. Local regulators are to decide how much MREL individual banks must hold, the ratio of equity to debt, and whether any of that debt should be subordinated. Determining in advance the order in which creditors would take losses in the event of a bank failure is considered critical to ensuring a smooth bail-in process.

In Denmark, “I don’t think the sticking point, as such, is around the level,” Aarup-Andersen said. “It is more around the level of subordination, and when we look across Europe, we see several different solutions.”

Last month, Swedish authorities set an MREL requirement for the biggest banks at 32 percent of risk-weighted assets and said about two-thirds of that should be debt. But they’ve yet to give the specifics, including details on possible subordination, setting off a wave of speculation among investors and analysts. The National Debt Office, which is responsible for implementing the rule, has since urged market participants not to jump to conclusions.

The European Commission plans to meet with national experts on Thursday in an attempt to unify rules for imposing losses on creditors, after Germany, France and Italy recently put in place laws that ranked creditors differently. Such variations threaten to create “competitive distortions” in the single market, according to the commission.

Seeking Clarity

Danske Bank expects to get more clarity from Denmark’s regulator after the summer, Aarup-Andersen said. “We are taking part in a number of work streams on MREL and we have a good dialogue with the FSA. We don’t think at this stage we have clarity in terms of which instruments we want to issue.”

The bank has a preference but “we’re not at the stage where there’s enough clarity on final rules in Denmark that we will start speaking publicly about it,” he said. “For us, we need more clarity and we’ve been promised that later in the year.”

Denmark has already said it won’t comply with a key element of BRRD: it won’t let small banks go bankrupt. The directive distinguishes between banks that are systemically important and those that aren’t. The latter are supposed to end up in bankruptcy court if they get into trouble.

MREL is just one of a number of issues on which regulators have yet to make a final ruling, leaving banks unsure of how to proceed. The Basel Committee on Banking Supervision has proposed new capital floors which, if adopted, could mean Danish lenders will need to raise as much as 130 billion kroner ($20 billion) in new capital, according to industry figures.

“There is so much lobbying going on, it’s at such an early stage, that what the final outcome will be, we probably need another 12 months before we have a clear view,” Aarup-Andersen said.

Danske has the capital to “deal with whatever” requirements come, he said. “We are comfortable with the most likely scenarios. You can always make up extreme scenarios.”