Paschi Model a No-Go in Denmark as Bail-In Orthodoxy Reasserted

  • Danish FSA head says he prefers aggressive approach on MREL
  • Crisis lessons show high costs of delays, Danish FSA head says

Denmark’s financial regulator plans to take an aggressive approach with banks that don’t meet new rules designed to protect taxpayers.

“We need to act a lot earlier than we have acted,” Jesper Berg, the director general of the Financial Supervisory Authority in Copenhagen, said in a phone interview.

Jesper Berg

Photographer: Jon Norddahl/Finanstilsynet

As a regulator in the first European country ever to force losses on senior bank creditors, Berg says Italy’s plight with Banca Monte dei Paschi di Siena is proof regulators can’t afford to wait when capital levels test lower limits. The same conclusion can be drawn from Denmark’s own experiences during the financial crisis, he said.

Denmark is taking an aggressive tack amid a lack of clarity over what regulatory action a breach of minimum requirements for own funds and liabilities (MREL) should trigger. The rule is the linchpin in Europe’s plan to avoid government bailouts of banks, but according to the European Banking Authority, the legal framework in question doesn’t specify what steps local authorities should take.

Enforcement Issues

The EBA said in December the options that authorities have are generally “too slow” or “too uncertain,” creating “practical enforcement problems.” The EU has since proposed expanding regulators’ powers.

Berg says history shows it’s wise to err on the side of caution. “From the cases we had over the last couple of years there have been huge losses to simple creditors, so we need to act a lot earlier,” he said.

Danske Bank A/S and a handful of other Danish lenders deemed to be of systemic importance to the domestic economy must hold MREL equal to almost a third of risk-weighted assets. As well as the existing stack of capital requirements, MREL will include recapitalization and loss-absorbing buffers.

If a Danish lender eats through the thin top layer of its MREL reserves (and breaches the recapitalization buffer), the FSA is “of the view that we can at that stage actually transfer institutions to Financial Stability,” the country’s bad bank, Berg said. Experience shows that waiting means “there won’t be enough money,” he said.

Denmark’s biggest banks all passed the EBA’s stress tests last year as Scandinavia outperformed much of the rest of Europe on capital adequacy. Denmark’s systemically important banks will probably issue somewhere between 5.8 billion euros and 14.9 billion euros in so-called non-preferred senior notes to comply with MREL, Danske Bank estimated this month.

Paschi Model

Berg ruled out the kind of precautionary recapitalization that Italy is planning for Monte Paschi after other efforts to support the world’s oldest bank fell short.

“Anything that smacks of the government taking losses, or the risk of the government taking losses, is not part of the government’s strategy” in Denmark, he said.

(It’s worth noting that a former Danish economy minister, Margrethe Vestager, will pass judgment on Italy’s plans for Monte Paschi in her current role as the EU’s competition commissioner. Though a staunch defender of strict bail-ins while a member of the Danish cabinet, she now says Italy’s handling of Monte Paschi is in keeping with Europe’s resolution rules.)

Denmark’s tough stance may prompt struggling banks to seek mergers instead, as was the case more than 20 years ago, when the FSA had a similar policy, Berg said. “We want to get back to the early 90s,” he said.

The biggest Danish banks face a 2019 deadline to comply with MREL, which the FSA says will need to be equivalent to 30 percent of risk-weighted assets, or twice total capital requirements. Under the FSA plan, even smaller lenders will face a requirement that exceeds minimum capital demands to avoid what the regulator has characterized as “messy” unwindings in bankruptcy court.

“You can just look at Italy right now to see the need for another approach,” Berg said. “The underlying assumption that you can use bankruptcy for small and medium-sized bank is, practically speaking, unrealistic, and we have the experience to show it.”

— With assistance by Boris Groendahl

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