Bloomberg News

Denmark Readying Proposal for Stricter Bank Impairment Rules

October 26, 2011

Oct. 27 (Bloomberg) -- Denmark is preparing a bill designed to clamp down on banks that fail to reveal the risks lurking on their balance sheets.

The proposal will be presented before Christmas, Economy Minister Ole Sohn said in a statement on his ministry’s website yesterday.

The announcement follows a report by the auditor general that criticized the Financial Supervisory Authority for underestimating the risky assets held by Amagerbanken A/S before the lender’s February failure. The collapse triggered the European Union’s first senior creditor losses within a resolution framework and left most of Denmark’s banks cut off from international funding markets.

The FSA should have been more alert to the risky strategies Amagerbanken used last year when the government granted the regional lender 13.5 billion kroner ($2.5 billion) in state- guaranteed loans, the auditor found. Six months later, Amagerbanken collapsed, costing taxpayers 2.1 billion kroner. The lender failed under the weight of bad loans to the real estate industry.

``It's a criticism we're taking very seriously. That's why we're looking into tightening reporting rules in future,'' FSA Director General Ulrik Noedgaard told broadcaster TV2. ``It's clear there are challenges associated with the situation we have now and that can lead to bank closures.''

Taxpayers won’t have to foot the bill for the error, Sohn said. The auditor general also found that the FSA arrived at a different conclusion as to the scope of Amagerbanken’s risky operations from the state winding-up unit, the Financial Stability Company.

“I have noted that the auditor finds it unfortunate that the FSA and the Financial Stability Company had different views on Amagerbanken,” Sohn said. Both units are independent and regulated by their own laws, meaning the ministry isn’t in a position to give them instructions, he said, adding he will investigate whether more can be done in future to avoid a similar situation.

To contact the reporter on this story: Tasneem Brogger in London at tbrogger@bloomberg.net

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


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