Bloomberg News

Danish Liquidity Aid Can’t Halt Failures, Wind-Up Unit Says

September 30, 2011

(Updates with central bank plan in second paragraph, Jyske Bank purchase in eighth.)

Sept. 30 (Bloomberg) -- The Danish central bank’s liquidity lifeline probably won’t prevent lenders at risk of insolvency from failing, the head of the Nordic country’s state winding-up unit said.

The 400 billion-krone ($72.6 billion) facility, which the central bank announced today, will broaden existing collateral rules to include bank loans. Lenders probably will be able to pledge bank loans in exchange for six-month liquidity at the central bank’s benchmark rate of 1.55 percent, it said.

The country’s lenders face a deepening crisis that threatens to stall a recovery in Scandinavia’s worst-performing economy. Two Danish bank failures this year triggered senior creditor losses, leaving international funding markets closed to all but the largest banks. Lawmaker efforts to spur consolidation and help banks sidestep Denmark’s bail-in rules have so far failed.

The liquidity program “will probably not solve all problems,” Henrik Bjerre-Nielsen, director at the Copenhagen- based Financial Stability Company, Denmark’s state-backed bank resolution unit, said in an interview before today’s announcement. “The kind of financing you can get by borrowing against your high quality loans at the central bank is not medium-term financing. And medium-term financing is crucial for having a proper financing strategy.”

Staying Afloat

The central bank is boosting its liquidity support to help lenders stay afloat as they struggle to refinance debt backed by a state guarantee that expires in 2013.

About 75 of Denmark’s 90 local banks probably need to disappear, Financial Stability Company Chairman Henning Kruse Petersen said in an interview this month. Mergers are being stalled by skepticism at Denmark’s healthier banks toward what may be lurking on the balance sheets of their troubled peers, according to Ulrik Noedgaard, the director general of the country’s Financial Supervisory Authority.

The healthy parts of Amagerbanken A/S, which failed in February, were bought by Faroese lender BankNordik P/F in May. The Torshavn, Faroe Islands-based bank was downgraded this month by Moody’s Investors Service, which said the takeover added risk.

Jyske Bank A/S, Denmark’s second-biggest listed lender, today said it bought parts of Fjordbank Mors A/S, which failed in June after losing money on loans to real estate and farming.

Refinancing

Banks are cutting lending and dumping assets as they struggle to refinance about 158 billion kroner ($29 billion) in state-backed debt through 2013. Lenders with the biggest refinancing burdens are unlikely to benefit from the central bank’s liquidity line, Bjerre-Nielsen said.

“If they’re in a situation where the liquidity they have acquired by issuing bonds with government guarantees is a very large amount, I don’t think they’ll be able to solve it with just having liquidity from the central bank,” he said. “But they can probably get part of the gap solved by the central bank. If you have a small gap, you should be able to bridge it with the central bank facility.”

The central bank said today that lenders will be able to borrow liquidity for six months, alongside an existing seven-day facility, at the benchmark lending rate of 1.55 percent.

Tap Facility

FIH Erhvervsbank A/S, the largest holder of state- guaranteed bonds, according to Financial Stability, probably will tap the facility to give it flexibility as it reduces its balance sheet and refinances loans, Chief Executive Officer Bjarne Graven Larsen said in an interview. The bank holds about 45 billion kroner in state-backed bonds, after repaying about 5 billion kroner earlier this week.

Still, the facility may not be enough for some banks, particularly if it expires in 2013, Graven Larsen said.

“For a bank to actually reduce the balance sheet and get to where you want to be, it simply takes time and two years is not a lot of time,” he said.

--Editors: Tasneem Brogger, Christian Wienberg.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net or Angela Cullen at acullen8@bloomberg.net


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