Bloomberg News

Danish FSA Tells Banks Not to Rely on Crisis Liquidity Aid

October 03, 2011

(Updates with bank shares in seventh paragraph, FIH CEO in eighth.)

Oct. 3 (Bloomberg) -- Denmark’s financial regulator warned the country’s banks against relying on a $72 billion liquidity lifeline offered by the central bank and urged lenders to do more to ensure stable funding.

The central bank on Sept. 30 said it will offer banks as much as 400 billion kroner ($72 billion) in liquidity, and provide six-month loans at a rate that tracks the benchmark on its seven-day lending program, currently 1.55 percent. The plan is designed to support banks cut off from international funding markets as they try to refinance state-backed debt coming due through 2013.

Banks should see the liquidity facility as “a possibility, and it’s good, but you shouldn’t stop working on creating a more sound funding structure,” Kristian Vie Madsen, deputy director general of the Financial Supervisory Authority, said in an interview in Copenhagen. “There are some banks that have a challenge when having to pay back the state-guaranteed funding.”

Denmark’s banks have been cutting lending and dumping assets as they struggle to refinance 158 billion kroner in state-backed loans coming due in the next two years. The government has said it will only extend the guarantee on loans in the event of a merger, as it seeks to spur a consolidation wave and help the bank industry avoid more insolvencies.

Credit Crunch

About 75 of Denmark’s 90 local banks probably need either to be bought or wound down, Henning Kruse Petersen, the chairman of the state winding-up unit The Financial Stability Company, said in an interview last month.

According to Jan Kondrup, director of the Local Bankers Association, the liquidity line will help avert a “tendency toward” a credit crunch. Denmark’s troubled banks will get “more flexibility” in organizing their finances, he said.

Danish bank stocks lost 0.4 percent at 1:20 p.m. in Copenhagen, outperforming the 46-member Bloomberg index of European financials, which sank 2.6 percent. Danske Bank A/S, the country’s biggest lender, fell 0.4 percent to trade at 78.25 kroner. Jyske Bank A/S, Denmark’s second-largest listed bank, dropped 0.6 percent to 164.70 kroner.

The liquidity line is “a significant amount of money,” Bjarne Graven Larsen, chief executive officer at FIH Erhvervsbank A/S, said in a Sept. 30 interview. The program also gives the central bank the option of expanding the collateral base further if the need arises, he said.

Funding Closed

‘They have the freedom in the future to include more loans,” Graven Larsen said. “It gives the central bank flexibility.”

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.

Before the central bank announced its liquidity line last week, the FSA had told lenders with outstanding state-backed loans to submit plans outlining how they will tackle the 2013 expiry deadline on the guarantee.

“They still have to do all that they can, but if they don’t succeed, this is an opportunity to buy some more time,” Vie Madsen said. “It’ll help the banks that run into liquidity problems. Banks that have asset quality problems, it doesn’t help on that.”

The central bank’s liquidity program won’t solve medium- term financing challenges, without which banks can’t achieve a “proper financing strategy,” Financial Stability Director Henrik Bjerre-Nielsen said in an interview last week.

Capital Hurdles

According to Standard & Poor’s, the program won’t help banks short of capital, analyst Per Tornqvist said.

“In order to save troubled banks, liquidity is important but it’s not replacing capital if capital is what is required,” Tornqvist said in an interview on Sept. 30. “For some of these banks, capital is the real issue. For some banks it might just, so to say, be liquidity.”

Banks will be able to borrow against their healthy loans, at a 35 percent haircut. The FSA said the central bank loans can only be used to make up about one third of bank liquidity requirements. Those availing themselves of the central bank’s facility will be subject to greater scrutiny from the FSA and under greater pressure to explain their funding strategies, the regulator said Sept. 30.

“The central bank facility is helpful in providing a buffer in a turbulent world,” said Jesper Berg, senior vice president and head of ratings and regulatory affairs at Nykredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds. “But it is not a long-term solution for banks as also suggested by the FSA’s focus on banks that use the facility and their long-term refinancing plans.”

--Editors: Tasneem Brogger, Christian Wienberg.

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

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


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