Bloomberg News

Danish Banks May Shun $76 Billion Lifeline to Avoid Stigma

November 01, 2011

(Updates with mortgage default data in 18th paragraph.)

Oct. 31 (Bloomberg) -- Danish banks may not tap a new central bank lending program and instead pay more to fund themselves via the market as they try to persuade investors they can get by without resorting to support measures.

The central bank opened a six-month lending facility on Oct. 28, after earlier this month broadening its collateral rules to accept bank loans. Still, using the collateral to gain access to the loans would leave less to secure senior creditor obligations. That risks scaring off investors and driving up funding costs in the longer term, said Lasse Nyby, chief executive officer at Denmark’s fourth-largest listed lender, Spar Nord Bank A/S.

“You will see some of the banks using the facility,” Nyby said in an interview. “The banks that have the option of finding another, but more expensive, solution might go for that.”

The central bank this month opened a 400 billion kroner ($76 million) liquidity line, the biggest in the country’s history. Governor Nils Bernstein said the program will help lenders repay the 158 billion kroner in state-guaranteed debt coming due through 2013. Most of Denmark’s roughly 120 banks have had no access to wholesale funding since Amagerbanken A/S failed in February, triggering Europe’s toughest bank resolution laws, including haircuts for senior creditors.

FSA Warning

“Nobody would give you a senior, unsecured loan if you use the liquidity line,” Sydbank A/S Chief Executive Officer Karen Froesig, said in an interview. “The loans are based on the activities of the company, but if the company has given the assets away, there’s nothing left.”

Denmark’s bank watchdog warned lenders earlier this month against relying on the central bank’s liquidity lifeline, urging them to do more to ensure they have stable financing. Banks “shouldn’t stop working on creating a more sound funding structure,” said Kristian Vie Madsen, deputy director general of the Financial Supervisory Authority.

Since the central bank announced its liquidity program on Sept. 30, a number of regional lenders including SparBank A/S and Noerresundby Bank A/S have said they’re unlikely to tap it. If too many banks shun the facility, that may persuade others to think twice before using it, said Thomas Hovard, head of credit research at Dansk Markets in Copenhagen.

“Whether there’s a stigma attached will depend on how many use it,” Hovard said. “If only one small bank gets hard cash, it probably would be stigmatized.”

Bond Sale Scrapped

Concerns about stigma may fade if international funding markets remain locked in the longer term, he said. “In a year’s time, if nothing else happens on the international funding market, we’re going to see more interest,” Hovard said.

Sydbank, Denmark’s third-largest listed lender, said last week it shelved a sale of senior notes originally planned for May. The lender has been unable to get a senior loan on “satisfactory terms” and will wait until markets “normalize,” it said.

Sydbank won’t borrow from the central bank, though it may use the liquidity facility as a backstop, it said Oct. 25.

The head of Denmark’s local bankers association is urging lenders to tap the facility and ignore warnings that investors might regard them with skepticism if they do.

Bad Results

“It’s completely wrong to stigmatize banks that use the credit facility,” Jan Kondrup, director of the local bankers’ association, said in an interview. “If you have a bank with bad credit, bad results, the rest of the world will already have seen this. Using this facility won’t necessarily indicate there’s a problem.”

Banks are more likely to use the central bank’s lifeline as a backstop, without actually drawing loans, Spar Nord’s Nyby said. Lenders whose assets satisfy the collateral requirements can use the facility to boost their liquid assets without borrowing funds.

Spar Nord, which sold its leasing business to Jyske Bank A/S last month after lending costs rose about fivefold, has yet to decide whether to include the facility in its liquidity reserves, Nyby said. “We’ll try and do things so that we don’t get into a situation where we have to draw on it,” he said.

Most banks being audited as part of an FSA campaign to clamp down on risky lending will fail an inspection due to be completed by January, the regulator said this month. The review includes lenders identified as “risky,” and in seven out of 10 inspections the FSA requires either higher writedowns or solvency requirements, Director General Ulrik Noedgaard said.

Job Cuts

Banks including the country’s largest, Danske Bank A/S, Jyske Bank and Sydbank, are cutting jobs and raising interest rates to offset rising funding costs. At the same time, declining house prices and a stagnant labor market are putting pressure on mortgage holders.

The number of houses repossessed by mortgage banks rose this year to its highest since 1995, peaking at 661 in the second quarter, before easing to 601 in the following three months, the Association of Danish Mortgage Banks said today. The number of homeowners in arrears in the third quarter was unchanged at 0.4 percent.

The situation may yet deteriorate, said Christian Heinig, chief economist at Realkredit Denmark, the mortgage unit of Danske Bank.

‘Prospects Worsened’

“The financial unrest and weak economic figures from the last several months mean growth prospects have worsened and unemployment probably hasn’t peaked yet,” Heinig said in a note today.

As many as 15 Danish banks may fail before the country’s crisis is over, Standard & Poor’s warned in July. Henning Kruse Petersen, chairman of the state-backed bank resolution unit, has said Denmark has about 75 too many regional banks.

“We all know that what’s happening on the international funding market is extreme, and it’s hard to be a small Danish bank in that context,” Hovard said. “Nobody really wants to state anything about this issue: who will use it first. The first ones won’t tell anybody, and the central bank doesn’t have to tell.”

--Editors: Tasneem Brogger, Christian Wienberg.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at

To contact the editor responsible for this story: Tasneem Brogger at or Angela Cullen at

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