Bloomberg News

Denmark Tells Banks Facing Insolvency to Prepare Auction Plans

October 12, 2011

Oct. 12 (Bloomberg) -- Denmark’s bank winding-up agency is telling struggling lenders to seek its help before they collapse as the government steps up efforts to push through takeovers to ensure the country doesn’t experience more bail-ins.

The Financial Stability Company will assist banks facing insolvency in cleaning up their accounts to make them more attractive for potential bidders, the Copenhagen-based agency’s Chief Executive Officer Henrik Bjerre-Nielsen said. The measure will save acquiring banks some due diligence work and spur takeovers needed to avoid triggering senior creditor losses, he said.

“If bank management feels they are in a vulnerable situation, they can prepare by getting the necessary data to have a speedy and well-prepared auction process,” Bjerre- Nielsen said in an interview.

The Oct. 8 failure of Max Bank A/S was the first to test Denmark’s consolidation bill, passed last month in an effort to sidestep the country’s bail-in laws. The risk of more bail-ins remains unless takeovers can be engineered more efficiently. While Sparekassen Sjaelland A/S stepped in at the last minute to buy parts of Max Bank, the auction process for failed banks still needs some refining, Bjerre-Nielsen said. Denmark doesn’t need more than 15 to 20 banks, according to Financial Stability’s Chairman Henning Kruse Petersen.

“Max Bank didn’t have a contingency plan, though they were in dialogue with the Financial Supervisory Authority,” Bjerre- Nielsen said. “We were able to find a solution in a specific case. We cannot guarantee that we can do it all the time.”

Credit Events

Denmark adopted its bail-in law in October 2010. Four months later, Amagerbanken A/S became the first bank to fail under the new legislation, triggering the European Union’s first senior creditor losses within a resolution framework. Fjordbank Mors A/S in June was the second bank to be wound down under the bill, inflicting further losses on senior bondholders.

The credit events have left most of Denmark’s roughly 120 banks cut off from funding markets. Moody’s Investors Service downgraded six Danish lenders in May, including the country’s biggest Danske Bank A/S, citing an absence of state support.

Lawmakers in September passed the consolidation bill, which subsidizes takeovers in an effort to ensure troubled lenders aren’t forced to resort to the country’s resolution framework.

Even though Max Bank’s failure didn’t trigger more senior bondholder losses, creditors may wait before investing in Danish banks again.

‘Knocking on the Door’

“It doesn’t mean that foreign funding will be knocking on our door tomorrow,” said Thomas Hovard, head of credit research at Danske Markets. “But we can be a bit more optimistic about the future.”

The FSA has warned troubled lenders it will conduct random inspections to ensure solvency ratios and writedown levels reflect the actual risk in a bank’s operations. When the regulator decides a bank’s reported solvency ratio is too low, it informs the Financial Stability Company. The agency then has 48 hours to decide whether the bank can be bought or whether it needs to be wound down under Denmark’s bail-in bill. The process is typically conducted over a weekend.

Any delays would prompt depositors and other clients to close their accounts in search of a healthier rival, Bjerre- Nielsen said. That would in turn frighten off potential bidders as the assets in the troubled bank are depleted.

“The best customers don’t want to belong to banks owned by us,” he said. “If they already, on Sunday or Monday, can see that there has been a rather good solution, the assumption is that they’ll stay with the banks. That’s a very important trick in the whole process.”

Good Indicator

Sparekassen Sjaelland will take over Max Bank’s healthy parts while the state will assume the bank’s bad loans. Under the consolidation bill, the transaction will be subsidized by Denmark’s guarantee fund. Senior creditors will be spared, while shareholders will lose their investments.

“It’s a good indicator that a smaller bank such as Sparekassen Sjaelland can manage to do this,” said Claus Groen Therp, an analyst at SEB Enskilda Securities. “It indicates there are smaller banks with fairly good capital ratios.”

There’s no guarantee that the new consolidation measures will be used again, Bjerre-Nielsen said. Max Bank had few senior creditors, making its resolution relatively simple, he said.

“Each banking failure, or avoidance of losses for senior creditors, is always a specific event,” Bjerre-Nielsen said. “I don’t think it’s possible to come to any general conclusion.”

--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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